How can indebtedness jeopardize a business?

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Business Banking relationships are essential. Many businesses acquire a bank loan collateralised by the total value of their assets to survive financially. Suppose a business owner with a good relationship with his bank dies. In that case, the bank may call the loan if the business begins to experience financial duress and defaults on repayment.

• Avoid collateralising personal assets. The prospect may not be favourable when the loan equals or exceeds the value of the business and personal assets.
• Following established rules, a bank may ask a business owner to collateralise a loan, not just with business assets and land, but with additional personally owned assets, which may encumber a spouse’s co-owned assets.
• Add to that a possible collateralising of any assets of a son or daughter (and spouses) who also share in family business ownership.
•  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
• If you own a business, avoid being held hostage by the lending institution financially or forced into liquidation.

Can life insurance reduce the risk associated with the family business debt? You can solve this in a family business such as a farm by insuring the oldest and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover the debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans, win back ownership, and discharge any personal assets liens.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy for each principal business owner and key persons. This product could provide a substantial sum of money to pay off debt if one were to experience a significant illness such as a heart attack or stroke. If an individual were incapacitated, they may need to be bought out by a partner or an heir (a buy-sell agreement should exist). The risk of a loan being called increases when an owner-manager is critically ill, and the bank manager loses confidence in the stabilising influence of that owner.

Note: Life insurance contracts should be compared with an advisor to understand what portion of the life insurance is tax-free.

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Life Insurance policies vary according to contract terms. Please read any Life Insurance policy contract provided, or the segregated fund summary information folder prospectus before the time of purchase. Full details of coverage, including limitations and exclusions that apply, are set out in the policy of insurance. Commissions, trailing commissions, management fees and expenses may be associated with segregated fund investments which may not be guaranteed and their market value changes daily and past performance is not indicative of future results. A description of the key features of a life insurance policy, a segregated fund; and any applicable individual variable annuity contract is contained in information provided by the company from which it is purchased. Talk to your advisor before making any financial decision. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. The information provided is accurate to the best of our knowledge as of the date of publication and is general in nature, intended for educational purposes only, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. Rules and their interpretation may change, affecting the accuracy of the information.