57% of SMEs had at least one form of business borrowing in 2015, an increase of 25% on 2011, according to research from Legal & General.
However, 31% of businesses have no cover for their debts.
The study revealed that a quarter of the businesses without protection in place didn’t have a policy as they had never considered it. Of those that did have an insurance policy, 89% took it out after being advised to do so by their bank or financial adviser, which L&G says illustrates the importance of advisers and their role in raising awareness of the risks in what is clearly a key influencer in firms’ uptake of protection.
However, 30% of businesses told Legal & General that the bank who arranged the loan never mentioned life cover, leaving many firms vulnerable to defaulting on their loans should a business owner or key person die or fall critically ill.
The report also provides information on the structure of corporate debt, with many SMEs borrowing significant sums in the form of unstructured loans. It found that, while the average value of business borrowing was £344,000, as much as five% of respondents had debts of £2m or more.
The most common method of borrowing was in the form of corporate loans, which were used by 25% of businesses with corporate debt. Credit cards were the next choice for businesses looking to borrow capital, with 23% having debt in this form – up from just 3% in 2011.
For debts of over £50,000, Directors Loan Accounts (DLAs) have increased in popularity, with the proportion of businesses holding a DLA increasing from 15% to 33% between 2011 and 2015. However, 28% of the directors surveyed didn’t realise that their DLA needed to be repaid in the event of their death, and over a third of businesses (35%) haven’t taken out life cover on their DLA to help repay the loan if they were to die.
The news that George Osborne was to reduce business rates following his most recent Budget was particularly welcome news for SMEs.
Richard Kateley, head of specialist protection at Legal & General, said: “The main reason behind firms not protecting their loans is a lack of awareness of the risks, and advisers aren’t having enough conversations to bring this to their clients’ attention to help close the business protection gap. There is clearly a business opportunity here for advisers, particularly given that 89% of firms who took out protection did so as a result of advice, showing that once businesses are informed of the risks they usually do something about it.
“There is a strong link between firms’ awareness of risks and their uptake of protection to cover said risks, meaning that if advisers were to bring these threats to business owners’ attention more often, we would most likely see an increase in the proportion of firms with an insurance policy in place.
“Business protection is, to some extent, an untapped market which offers good returns for advisers, with case sizes typically being two to three times larger that domestic protection products . We’d like to see more advisers move into this space in the future, so that they may broaden the scope of their own business whilst helping their clients to strengthen theirs.”
