Mind your own business

There were 5.7 million small and medium sized enterprises (SMEs) in the UK in 2018, which was over 99% of all UK businesses. Drilling down into that number, micro-businesses have one to nine employees, and there were 5.4 million of these in the UK for the same period, accounting for 96% of all businesses.

Customers need access to simple and transparent products and tools that provide absolute certainty around the need for simple protection. This will provide the customer and lender the opportunity to mitigate risk associated with death and subsequent repayment of borrowing.

Adopting the usual definition of an SME as any business with fewer than 250 employees, this means that 96% of all UK businesses have fewer than 10 employees.

Yet surprisingly only 20,000 business protection policies were taken out in the UK during 2018.

Taking it one step further, there were 73,971 new loan approvals to SMEs across the UK in Q1 2018. Put simply, using the number of business protection policies taken last year and averaging by each quarter, it means that only 7% of these loans could have potentially been protected.

So why is this?

Is it because small to medium business owners don't prioritise or have enough time to dedicate to such matters? Is it because cover is deemed too expensive? Or perhaps they just haven't considered it and tend to consider their family's wellbeing over the future of their business!

Based on this insignificant 20,000, there remains tens of thousands of SMEs lacking the important life, critical illness and income protection cover they need to guard against most business-related scenarios. The average one-man band, for example, could not survive any more than a month were they to become unable to work due to accident or sickness. Worse if they died, leaving their family to deal with not only any outstanding debts and expenditure, but other business affairs as well.

Typically, and from previous experience, non-advised conversion rates for business protection are low, but the event trigger of borrowing funds, for example, should be an enabler to help any business owner identify why they need to protect themselves and what against. This in turn would give rise to better engagement levels and sales volumes for IFAs. Therefore, while subjective, one would expect a greater volume of adviser referrals due to higher levels of customer engagement.

Tackling the conundrum

There remains tens of thousands of SMEs lacking the important life, critical illness and income protection cover they need to guard against most business-related scenarios.

How do we tackle this, if you can't rely on customers acting on their own merits, especially if protection is not a condition of a lending sanction?

Are we still victims of the risk that business protection is mis-construed as a form of PPI like other forms of protection? Any advice must leave customers in absolutely no doubt what they are purchasing, so if that box is ticked is it perhaps the process of buying protection against debt which is so divorced it is difficult to clearly see the advantages?

Customers need access to simple and transparent products and tools that provide absolute certainty around the need for simple protection. This will provide the customer and lender the opportunity to mitigate risk associated with death and subsequent repayment of borrowing.

Webline has seen a fivefold increase in Business Protection quotes since this time last year. One of those products often quoted for is Relevant Life Cover, which is a term life policy that is taken out by the business owner protecting the life of an employee, whereby the benefits from the policy are paid to the deceased's family or estate under trust. From experience, we know that every single business is likely to have at least one business protection need.

Whichever way you look at, business protection offers much needed cover to those currently embarking on their own businesses. So, what does it offer a business owner?

  • There's the obvious financial safety net in the event of the death of a key person or them contracting a critical illness.
  • The ability to provide funds to the remaining partners or shareholders helping them buy out the critically ill partner or shareholder.
  • Purchase the deceased's shares from his or her estate.

Protection helps fund the repayment of any business loan, again in the event of death or a critical illness. It ensures business continuity by providing funds available to the remaining shareholders or partners to enable them to purchase the individual's share of the business, and it ensures that the deceased's family or the critically ill shareholder or partner receives a fair value for their share of the business.

Sounds perfect. Any downsides?

Trusts can cause headaches for the uninitiated and is one of the main reasons why businesses must seek financial advice. They can be relatively expensive to set up and maintain, especially when compared directly to sole trader and partnership agreements. Set-up fees could be reduced by using a proforma trust deed, but in most scenarios, one would need professional help in the first instance.

But, just like any major decisions made around finances, professional help is crucial in deciding whether a trust will be right for a business, and of course, which trust is most appropriate. This is probably the most important area to understand, whether you choose to go with a trust, sole trader, partnership or company agreement.

Synaptic can help with facilitating business protection advice process. Business protection is available through Webline portal – contact us to find out more and how we can help you to create better financial outcomes to your customers.

For more details contact sales@synaptic.co.uk or call us on 0800 783 4477