How banks view lending money to business owners.
Banks follow established rules, which include asking a business owner to collateralize a loan, not just with business assets, but also with personally owned assets, such as a principal residence and cottage. Collateralization can include requesting a spouse’s co-owned assets to be collateralized, even if the business is incorporated.
Add to that a possible collateralization of any assets of a partner or adult child (and their spouses) who also share in ownership. Small business owners can lose their shirts if they default on a loan.
What if an owner dies? It is unwise to assume that a good relationship with the bank will continue if the heir of a small business, or a partner, is not in favour with the bank manager. Bank managers can change or apply strict policies while reassessing leniency shown to previous owners or administrators.
Eliminate any doubt in a family business, such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual life insurance policies. In the case of a non-family business, each owner/partner should be insured to cover the company’s debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and, essentially, win back ownership and discharge any liens of personally owned assets.
What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy on each of the principal business owners and key persons. CI insurance could pay off a considerable bank debt if one were to experience a major illness such as a heart attack or stroke. One could end up incapacitated and may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is sick and the bank manager loses confidence in the stabilising influence of that owner.
The Buy-Sell agreement is one of the most important legal documents a business can have to protect shareholders in the event of the death of a business owner/partner.
They must be planned ahead Whether you own a partnership or corporation, we can help you set up a buy-sell agreement while you are alive and capable of doing so. We will help you value your company and set up the right Buy-Sell Agreement to meet Canada Revenue Agency’s (CRA’s) standards.
Funding the Agreement We can determine if the company has the cash flow or a large amount of money available to fund the buy-out of the deceased or disabled owner. If not, life insurance can be used to fund a buy-sell agreement as it can pay a large amount of tax-free capital at the right timing of the death of a business owner/partner.
Making it legally binding We can meet with your lawyer and the buyers’ lawyers. After it is drafted, all parties will review it to their satisfaction, and then sign it to make it legal. It is suggested that the life insurance be purchased first to ensure that one is insurable. Even where there is a medical problem, in most cases, there is an insurer willing to design a policy to suit the risk, based on the respective health of the individual.
Start-up firms and smaller companies are especially vulnerable to potentially devastating financial risk because they often lack big company sophistication and in-house risk-control expertise. We will help you gain control of your financial risk. Life Insurance. We help business leaders provide appropriate life insurance to pay off debts and/or the mortgage, educate the kids, and/or provide income for a spouse or a disabled dependent.
Disability Income Replacement Insurance. We will examine your need for income replacement insurance that can help replace your paycheque in case you get hurt or sick.
Key Person Insurance. We will assess your need for an insurance policy designed to hire the right person if a key individual became sick or died.
Critical Illness Insurance. If business owners develop cancer, a heart attack, or a stroke, the illness can wipe out a small business. We have many plans to protect you from such concerns.