53% of UK SMEs would close within a year if a key employee died or became critically ill, according to new research from Legal & General.
This represents a 13% increase on 2015 and the FTSE 100 insurer’s ‘State of the Nation’s SMEs’ report, which surveyed over 800 small businesses, found that new companies and sole traders were particularly prone to closing after a critical event, with 67% and 73% saying that they would last less than a year respectively.
Although SMEs were clearly aware the impact the loss of a key employee could have, many did not currently have key person insurance in place to protect their business should this happen. 32% of SMEs said they had not even considered key person insurance, whilst 31% said they had not got round to looking into it. A further 28% said they thought cost would be an issue in taking out a key person policy.
Highlighting a further lack of awareness about business protection, 39% of SMEs also thought the long-term absence of a key employee would not affect their business’s cash flow. However, in contradiction to this, 34% said they would be fearful of losing their job.
Richard Kateley, head of intermediary development at Legal & General, said: “SMEs represent 99% of the circa 5.4m private sector businesses in the UK and are a vital source of employment for millions of people, let alone the UK economy as a whole, yet as our research shows, a significant proportion of these businesses across the UK are leaving themselves at risk from critical events. Many businesses insure what they can see and feel, such as their contents, property or vehicles, but many forget about a business’s most important asset – its people.
“For over half of the SMEs we surveyed to believe they would last less than a year should a key employee die or require a long absence due to a critical illness is worrying in itself; the fact that it is a risk that they have not considered or realised before is an even bigger worry. It is vital that businesses consider protecting their future against such an eventuality and advisers can play a vital role in this.
“Whilst access to finance remains vital in helping UK SMEs to establish themselves and thrive within their sector, many are continuing to rely on unsecured lending sources, such as director loans or even credit cards. The fundamentals of Britain’s economy might be strong, but there should be concerns over what would happen if these businesses were unable to pay their debts in the face of a financial shock or uncertainty as Britain begins the process of leaving the European Union.
“As an industry, we need to address these risks by raising awareness amongst SMEs of the different types of business protection. Many small businesses already work with accountants, solicitors or even financial advisers, making advisers well positioned to start a conversation about business protection and the risks of remaining unprotected, fulfilling their duty of care.”
