There are numerous reasons why your business may require a loan; generally to find expansion - to buy stock, finance the cost of new equipment, or recruit a new sales team for example. If your business has obtained a loan, you must consider not only how to meet any ongoing repayments but also how to finance full repayment should the lender call in the loan prematurely.
Commercial lenders often make a business loan subject to repayment on the death of a certain, often key individual. Alternatively, if finance has come from a director's loan account, and the director were to die, then their estate may demand repayment of the outstanding loan.
M & K McGee, Directors, NAL Ltd, Worcester
Business loan protection can provide your business with a cash sum that can be used to help repay a loan on the death or, if required, earlier serious illness of a specific individual. The loan policies should cover the amount and duration of the loan. The term for the loss of profits cover will depend on individual circumstances, but a five-year term is typical.
If your business already has loan cover, the loss of a key individual could affect the ability of the business to pay back any loans. Financial institutions will often lend money to businesses based on one or two key people in that business. If something happens to either or both key people, the financial institution would probably want the loan to be repaid. It's becoming more common for financial institutions to ask for some form of protection to be in place to make sure any loans could be repaid.
Many directors and shareholders have made loans to their companies; have you? It could be made up of loans made by the director or as a result of dividends or remuneration that hasn't been drawn out of the company. If that director died or became critically ill, the loan would need to be repaid. The company may not have the money available to repay the loan. Therefore, the director's loan account should be covered to protect the company, the director and the director's estate.
Often the only time any advice is given is when a company seeks a loan or funding and often they feel hemmed in by their bank, who will often be selling their own products and insist on Loan Protection.
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