The statistics are scary. More than half of the year’s new SMEs will close within three years, and 75% won’t last until 2024. That means in five years’ time, only 25% of businesses opening this year will still be serving clients and customers.
What is it that makes a business successful? Long-term success takes more than hard work and a little luck. To guarantee SME longevity, preparation and protection is imperative. You wouldn’t run a marathon without training and the correct sportswear, so preparing to run your business shouldn’t be any different. Having adequate business protection insurance ensures you are prepared for any problems should they occur.
Businesses are run on people. This is especially true for small businesses, where the loss of a key employee or partner can seriously affect your finances and business position. To ensure the survival and growth of your SME, profitability and financing remains key. The expansion of private equity markets has made it easier for start-ups and SMEs to gain access to the capital they need to begin. Protecting those investments, however, remains a major obstacle as many firms remain poorly equipped to deal with issues if they arise, which leads to large pay-outs and wasted capital.
Think: Which employees are integral to the success of your SME?
The loss of a key person can have a serious impact on your business’s finances as sales and profits begin to decrease and the workload increases for your remaining staff. As an SME, this can cause real problems and lead ultimately to the closure of your company.
A key person is defined as an employee whose death or continued absence would seriously affect the profits of a business. Their skills, knowledge and experience are vital to your SME’s financial success. This may include people such as sales directors, IT specialists, managing directors and head of departments.
Key person insurance, or key man cover, is the process of a business insuring itself against the financial loss it would suffer if a key person in their business died or was diagnosed with a critical illness. The key man policy is designed so that your company will receive a sum of money which can be used for expenses until you can find a replacement person, pay off debts or distribute money to investors. Following the loss of a key person, this type of insurance protects your business by ensuring that you have options other than becoming part of the 75% of businesses that must close.
Think: What would happen to your company if your business partner became unable to work?
37% of businesses don’t have share protection or partnership protection in place but losing an owner can have a huge impact on your SME and can quickly result in financial difficulties. If another owner dies with no protection in place, their share in the business may be passed onto their family. It is then down to your business partner’s family to decide what they want to do – they may decide to become involved with the running of the business or they could even sell their share to a competitor. Not only this, but the uncertainty over ownership may cause banks and investors to restructure or cancel their funding. Having adequate protection in place ensures that you can avoid these issues.
Share and partnership protection helps you keep control of your company if your partner dies or is diagnosed with a critical illness and finds themselves unable to work. Share protection is limited to companies; however, partnership protection is for partnerships and limited liability partnerships.
With share protection, a lump sum of money is provided to the business owners, which can be used to purchase the decreased shareholding director’s interest in the business. With partnership protection, the funds become available to allow the remaining partners to buy a partner’s shareholding. This protection ensures that your business can remain open and running in the event of a tragic situation.
Think: Could your business pay back the loans due if a business owner dies or is severely ill?
When a business owner dies or suffers a severe illness, banks and other types of lenders can demand that any outstanding loans are paid back immediately. Having to pay back large unsettled loans in one go can have a serious impact on the finances of a business – there’s a reason the business needed to take the loans out in the first place.
Business loan protection is similar to personal life insurance taken out to cover a mortgage. Used by the owner or director of the business who is taking out loans to benefit the company, business loan cover helps if a business owner dies or suffers a severe illness. This type of cover provides a lump sum for business loans so that it does not have to come from a company’s profits. This cover works with both owners’ loans, where an owner has lent their own money to their business as well as bank loans.