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The Great Protection Gap & State of the Nation’s SME’s

It’s no secret that succeeding in business is tough, and the longer you can avoid potential pitfalls and obstacles, the better. The trouble is that small and medium-sized businesses in the UK face threats, and often, these come out of the blue. Unexpected problems can hit companies hard, especially those that do not prepare for the worst. Research analysing the state of SMEs in the UK highlights a widespread lack of planning among companies.

There is a massive gap between what protection business’s have in place and what they need!

Research undertaken by Legal & General highlights an alarming gap between the present and future in terms of protection and contingency plans. According to the report, 53% of SMEs believe they would stop trading within 12 months of the loss of a key individual, yet over 50% of business owners don’t leave instructions about their company shares in their will. Almost 40% of business managers said that the death of a key person or diagnosis of a critical illness would have the most significant impact on their company, despite the fact that over 75% of those who didn’t have business protection said that they didn’t see the need to take out cover.

The report also outlined the prevalence of debt among UK small and medium-sized businesses. Of the 5.5 million companies in the UK, 99% fall into the small or medium size category. Within this bracket, two-thirds have some form of debt, and average borrowing stands at £176,000. Research suggests that the proportion of SMEs in debt has increased significantly in recent years, with rates rising from 32% in 2011 to 65% in 2018. The most common sources of borrowing include business loans, bank overdrafts, director’s loan accounts, personal loans, and credit cards.

What is business protection and why is it important?

Business protection is an umbrella term, which relates to a series of products and plans that are designed to reduce the risk of business failure by providing protection against unexpected eventualities and obstacles. Examples of products include:

  • Key person protection: a policy that protects against death, terminal illness, or the diagnosis of a critical condition in a key person, for example, a chairperson or managing director.
  • Share protection: a plan that enables existing shareholders or business owners to buy the shares previously owned by somebody who has died or been diagnosed with a critical illness.
  • Business loan protection: a policy that helps clients to pay mortgages, loan repayments, or overdrafts in the event of a guarantor dying or being diagnosed with a life-threatening or limiting condition.
  • Relevant life plan: a life insurance policy, which enables employers to offer death in service benefits to their workforce.

These financial products are designed to provide answers to questions that may arise in the event that a company owner passes away, or a key shareholder is diagnosed with a critical illness, for example.

Business protection is crucial because nobody knows what the future holds. Even the most stable, profitable businesses can face tough times, and bolts out of the blue are not unheard of. Life can throw curveballs, and as a business owner, you need to be able to react and respond swiftly. If somebody was to ask you what would happen to your company if a key person passed away unexpectedly, for example, would you be able to provide an answer that reassured your staff and shareholders? Business managers and company directors will always wish that they never have to call upon protection policies and products, but it’s hugely beneficial to know that they are there if required.

Who is at risk?

All SMEs are at risk due to the fact that life is unpredictable, and there is a chance that everything could be lost without suitable protection and procedures in place to cope with traumatic events or unplanned changes. The State of UK SMEs report shows that having no cover is particularly commonplace among these types of business.

All SMEs are at risk due to the fact that life is unpredictable, and there is a chance that everything could be lost without suitable protection and procedures in place to cope with traumatic events or unplanned changes. The State of UK SMEs report shows that having no cover is particularly commonplace among these types of business.

  • First-generation family-run companies (39% have no cover)
  • Small business with a net worth of less than £250,000 (36%)
  • Companies with borrowing of less than £50,000 (39%)
  • All-female owned companies (42%)
  • Sole traders (48%)
Why don’t businesses have protection?

Small and medium-sized businesses all over the UK are taking risks by not investing in business protection, but why don’t companies have these policies and plans in place?

Key person protection

More than 50% of SMEs do not have key person protection. More than 30% of business owners said that they hadn’t considered it, while 31% admitted that they hadn’t got around to taking out a policy. Over 27% said that cost was a concern. The main issue with low uptake rates is the potential impact of the loss of a key person. Almost 75% of sole traders and 67% of new companies said that their business would stop trading immediately.

Share protection

More than 50% of business owners have left no instructions in their will related to shares. Share protection enables partners, members, and directors to maintain control of the company. If the shares are not mentioned in the will, they may be passed onto the individual or group of people that inherit the estate, for example, family members. More than 25% of businesses said that they would attempt to buy the available shares.

Relevant Life Plans

The majority of UK SMEs were not aware of Relevant Life Plans, or RLPs. Over 85% of small business owners with a profit of less than £50,000 have never heard of RLPs. Having heard about the benefits of Relevant Life Plans, 73% were keen to find out more, and only 9% ruled out investing in this product.

Business Loan Protection

Almost 30% of businesses were unaware that a director’s loan account needs to be repaid in the event of death.

The role of financial advisers and experts

This report highlights a widespread lack of awareness about the business protection products available to companies in the UK. As such, financial advisers have a significant role to play in contacting businesses, discussing products and plans that are suitable for different types of business, and providing tailored recommendations. Eighty-five percent of companies that had business protection had acted on advice from financial experts. Business owners are most likely to listen to financial advisers and accountants. The most common ways SMEs were contacted about business protection were meetings with solicitors, accountants and financial advisers, seminars and social and business networking.

Research shows that many entrepreneurs are receptive to advice, with 73% of those who were informed about Relevant Life Plans eager to find out more and less than 10% ruling it out. Providing details about products and highlighting the benefits is likely to increase investment in business protection, as there is a lack of awareness about individual products, and a large proportion of business owners also assume that shielding their company costs too much.

One of the most significant findings of the report is a lack of thought and future planning related to the loss of a key person. Many business owners have not given any thought to what would happen to the company if the managing director died, for example. Alarmingly, more than 50% of businesses would cease trading straight away in the event of the loss of a key individual.

More than 80 new businesses are launched every hour in the UK. While some succeed, failure rates are high, and every company faces risks. To nullify the threat of unexpected events that could destabilise a business, investing in business protection is an excellent idea. By protecting your business, you will be able to secure the future and ensure that the company continues to operate smoothly.

In conclusion its pretty obvious that UK business is not nearly equipped enough to ride out a loss of a key person, shareholder or major player within a company. Much of this is down to the pure fact that business protection is generally un heard of and its the job of advisers such as ourselves to make sure this does not happen.

Thanks for the research from Legal and General. A full report of their findings can be found here.