For small to medium business owners, signing a personal guarantee has become standard practice as part of a commercial loan approval process. As a result business owners are unknowingly putting both their business assets and personal assets at risk.
Most businesses, in order to start or expand, need to organise finance through their bank or other lender. In today’s financing and securities market, the ‘guarantee’ has become an increasingly popular tool for the protection of the lender’s money.
“Unfortunately, when we die, banks just don’t let the debt die with us. In fact, it’s completely the opposite” says Peter Edmonds, Director at Perks Integrated Business Services.
It is not well known but in the majority of bank security documentation, the debt is to become immediately repayable upon death or permanent disablement or some other departure of a guarantor or co-surety to a loan. These are considered acts of default.
“Lenders just want their money back but when there’s just not enough cash lying around, a business owner, or their dependents, could be forced to sell any asset to repay the lender” says Peter Edmonds.
All too often the only realizable asset is the family home which leaves dependents in the unenviable position of trying to refinance the loan, disposing of the asset as quickly as possible or downgrading the family home.
Guarantor Protection is a cost-effective and logical solution which utilizes life insurance to provide a payment upon death, permanent disablement or occurrence of a serious medical condition. The proceeds can then be used to repay the loan and protect both the assets of the business and the family.
“Guarantor Protection Insurance is an important consideration for any business with debt. Without it, your business and family could be at risk of financial loss if it is not properly planned for”.
How much Guarantor Protection Insurance a business needs depends on a number of issues such as each business owner’s individual circumstance and the term of the loan facility.
If each owner is responsible for one hundred percent of the loan then, as guarantors, each owner is equally vulnerable until the loan is fully repaid. In such cases, each guarantor should be insured for one hundred percent of the debt. However, if each guarantor is liable for only a portion of the debt then only that portion needs to be insured.
“It is really important when you are taking on any business debt that you make sure both your business and personal assets are adequately protected by insurance if something goes wrong.”
Some years ago a client with two partners decided to expand their small business and borrowed $400,000 to purchase a large workshop. Each partner was required to sign a personal guarantee against their home.
As part of the planning process it was recommended that along with arranging the finance they also look at how their insurance needs would change as a result of their increased debt. Accordingly each partner considered Guarantor Protection Insurance and took out identical policies for $400,000 each.
Tragically, last year one of the partners died of cancer. As a result their Guarantor Protection Insurance proceeds extinguished the debt owed and associated personal guarantees. This allowed the remaining partner to continue operating the business.
However, had these two partners not planned so carefully, the end scenario could have played out very differently.
For more information on Guarantor Protection Insurance call us today on (08) 8273 9300.
