Corporate debt protection: the forgotten cover as £223 billion of SME debt sits unprotected

According to the study, over half of businesses have some form of corporate debt averaging £144,980. More than a third of these small businesses rely on personal guarantees from their business owners to obtain the bank loans, overdrafts and other corporate debt, which are essential to keep cash flowing in their businesses; yet over half have no cover in place to repay this debt in the event of the business owner dying or becoming terminally or critically ill.

Further to this, over half of small business owners expect their borrowing to either stay the same or increase over the next 12 months. With £223 billion of debt currently not covered by insurance, this paints a potentially stark picture for UK businesses.

Bank overdrafts are the most common form of corporate debt, held by over a fifth of UK businesses questioned. However in limited companies, the highest debt was through director loan accounts, and a quarter aren’t aware that these need to be repaid on death.

There has also been a significant rise in the use of alternative sources of debt, in particular overdrafts and credit cards. The findings showed that the number of UK businesses taking on credit card debt has increased from 3 per cent in 2011 to 20 per cent in 2013, while businesses using overdrafts have increased from 18 per cent to 21 per cent. Meanwhile, the number of businesses taking on bank based loans has reduced from 30 per cent in 2011 to the current 16 per cent.

The research also homed in on advice, asking business owners who have bank debt whether their bank had recommended they take out life cover. Almost two thirds of businesses said life cover was never mentioned by their bank, while a further 14 per cent said it was mentioned but they were never referred to an adviser.

Clare Harrop, Head of Specialist Protection at Legal & General says: “Taking on corporate debt is an inescapable reality for most businesses owners looking to sustain and grow their businesses, and it’s certainly interesting to see a rise in alternative forms of debt such as overdrafts and credit cards.

“Corporate debt protection cover is essential for any business with debt, to ensure the business is safeguarded against the financial risks associated with death or critical illness of a business owner and not left with a serious debt to settle. Basic protection could save a business, not to mention to a business owner’s personal wealth.”