Government figures show there are 5.6 million private sector businesses in the UK, with 98% of these businesses employing less than 50 employees.
The unprecedented events of the Covid-19 pandemic have massively impacted many of these businesses, their employees, and families. It's reported that for 1 in 5 businesses recovery from the pandemic is their biggest concern, a third are in fear of running out of money, whilst almost 25% are concerned about being able to pay back loans from Government, private lenders, or friends and family.
Whilst there are signs of encouragement for business owners, there are still many businesses exposed to risks – particularly in the light of the current economic and political situation and rising costs which are adding to the challenges that businesses are facing.
Simply Business recently asked hundreds of small business owners what their biggest challenge is now, and most businesses (70%) said rising costs, with almost 1 in 5 stating that labour shortages and recruitment challenges were of concern.
Here we identify some of the potential challenges SMEs may face and how you, as a business owner, could mitigate them.
Many businesses will borrow money at some point. Borrowing takes many different forms including commercial loans, private or family loans, or director loan accounts.
Businesses are now running high levels of debt, especially because of the Government’s Bounce Back Loan and Corporate Business Interruption Loan schemes, launched to help support businesses through the pandemic. 1 in 4 business who have corporate debt used Covid-19 finance.
- 75% businesses have some form of business debt
- Average borrowing amounts to £200,000
- 54% have given personal security for their business borrowing
- The proportion of businesses using personal loans to fund their business has almost doubled (since 2019)
What all loans have in common is the need for the business to be able to repay the loan and Covid-19 seems to have shifted perceptions of protection among business owners. Over half of all businesses are now likely to consider protection for many different needs, including taking out cover for business loans.
The loss of the person who has guaranteed a loan is particularly serious for a business and the increase in security provided via personal guarantees or assets, indicates many owners are having to expose themselves and their families to these loan risks.
To mitigate risk you could utilise protection to give the business the ability to repay any borrowings whether that is providing the monthly repayments in the event of illness or providing lump sums to meet the capital amounts in the events of critical illness or death of a guarantor.
Business loan protection helps a business pay any outstanding overdraft, loans, or commercial mortgage, should the person covered die or is diagnosed with a terminal illness, or critical illness (if specified and/or chosen) during the policy term. When a valid business loan protection claim is made, a sum equal to the outstanding debt could be paid to either the business or directly to the lender.
A business becomes vulnerable on the death of the owner or key director because creditors, including lenders, get nervous and can call in debts. Receiving a pay out to clear business debt means the business can move forward on a firm footing – and if the sale of the business is the way forward, the value can be protected as creditors have been satisfied.
Losing someone important to the business
It’s common for small businesses to rely on just a few people for their profits, whose skills, knowledge, experience, or leadership make a big contribution to its success.
- 6 in 10 businesses said they had 3 or more key people
- 70% said they would cease trading in less than 2 years with the loss of a key person
- Over half (52%) said the death of an owner would be the top risk to their businesses' future.
When business owners considered the impact of a loss of a key person, they were most concerned about the key person having a critical illness or dying. This was closely followed by the key person being absent due to illness. Only 9% said they had heard of key person protection insurance and had taken a policy, even though it's likely a business could have several key people, each with different skills and responsibilities that could be protected.
Key person protection helps small businesses move confidently through any financial uncertainty if a key employee needs time off work because of illness or injury or the key person dies. It protects lost profits, meets the cost of replacing skills, or supports any ongoing loan repayments.
Unlike a personal life insurance policy, the business pays the premiums, and it is the business which receives the lump sum benefit to cover its loss to stabilise cash flow and keep the business trading as normal at a difficult time.
Yet, many owners don't want to consider the problems they'd face if they or a key person died, became critically ill or injured - nor contemplate the prospect of the death of an owner of the business.
As a result many businesses state they have no specific arrangements for their shares, and the business owners have rarely considered the impact on themselves, their families, other shareholders or their business.
However, a share protection arrangement is designed to ensure that the aftermath of a shareholder’s death is as smooth and stress free as possible. These policies require a series of legal agreements that set out how shares are to be managed if a shareholder passes away. The primary difference between key person cover and shareholder protection is who receives the payment. Shareholder protection ensures the family of the shareholder inherit the value of their shares, and the continuity and control of the business is secured by the purchase of shares for the remaining shareholders.
Our advisors are ideally placed to help businesses understand the uncertainty of risks, and to help you make the right decisions in protecting yourself and your business against certain unexpected and in many cases unforeseen events - which could be abated with business protection. For advice and a recommendation about which protection policy will best suit your business needs, contact our business protection experts here at Essential Insurance on 0800 612 8005.