Business Loan Protection 2024 Guide

Discover how business loan insurance can protect your business, shareholders, and family if an owner dies suddenly.

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Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

When a business invests for growth, it often does so by taking on debt.

Business loan protection can help mitigate the risk of that debt becoming unaffordable due to a business owner suffering death or critical illness.

Read on to find out more...

What is business loan protection?

Business loan protection is life insurance that enables a company to repay a loan, overdraft, or commercial mortgage if, during the policy term, one of the owners, directors, or key employees dies or becomes terminally or critically ill.

Also known as business loan insurance, it pays out a one-time lump-sum cash benefit either to the business or directly to the lender.

Cost-effective business insurance

Many businesses borrow to purchase assets such as machinery, fund acquisitions, or run an overdraft / revolving credit facility to manage cash flow.

A business loan insurance policy is therefore a cost-effective way of protecting both the company and its shareholders.

Why is business loan protection important?

Upon a limited company owner's death, lenders reserve the right to call in a business overdraft, loan, or commercial mortgage.

This can often result in severe cash flow issues for the business or, in the worst-case scenario, the business being forced into administration/liquidation.

Personal guarantees

In addition, any personal guarantees provided for the loan or mortgage may be enforced by the lender. Potentially putting at risk a family home or other financial assets that form part of the deceased's estate.

As you can see, a business owner passing away or becoming terminally ill (with a diagnosis of less than 12 months to live) can have a huge impact on a company.

Personal guarantees provided for the loan or mortgage may be enforced by the lender

Responsible owners look to protect both their business and personal assets for the sake of themselves, their families, and their employees.

Business loan protection does just that.

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How does business loan insurance work?

Business loan insurance premiums are paid for by the business, not individual shareholders/directors.

The sum insured can be on a level or decreasing term basis, and should match the outstanding loan(s) debt, including any commercial mortgages, business overdrafts, etc.

Upon the death of the shareholder, the business puts in a claim with the insurer. Once verified, the insurance company pays the benefit amount to either the business or directly to the loan provider(s).

The difference between level and decreasing cover

Level term cover means the payout will remain the same (the sum insured) regardless of at what point the claim is made during the policy term.

It's often used where the business has taken out an interest-only commercial mortgage, and thus, no capital is being paid off.

Decreasing term insurance reduces in line with the balance of outstanding debts over the policy term, making it suitable cover for business loans.

Is business loan insurance mandatory?

No there's no legal requirement to take out business loan protection if your business takes out a commercial mortgage or loan.

But it's worth considering the potential consequences both to the business and shareholders of not taking out a policy, should the worst happen.

For example, would the business would suffer financially if a shareholder died?  

Could it result in a lender enforcing the personal guarantee provided by the shareholder, with the result that the debt gets passed onto their estate?

Business loan protection is an affordable way for a company to mitigate those risks.

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"Brilliant from start to finish. Graham managed to find a main high street lender who offered a brilliant rate. Would highly recommend."

Tracy Boyle - Google Business Review
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Is business loan protection a tax-deductible expense?

No. The cost of paying for business loan protection is not a tax-deductible business expense unfortunately because the lender is a significant beneficiary.

As the benefit isn't 'wholly and exclusively' for the business, HMRC doesn't allow it.

How to get a business loan protection quote?

SEMH are an independent mortgage and protection adviser. This means we'll source the most suitable business loan protection quote for your circumstances from a wide range of insurance companies.

The suitability of a particular product is based on it's key features and your needs, preferences, and budget.

We don't charge a broker fee for our protection advice, and will always be clear about the level of commission we receive from the provider, which doesn't affect the price you pay for the cover.

SEMH can also arrange other business insurance policies including relevant life cover, business shareholder protection, and executive income protection.

To get a quote, call 0117 205 0655 during our office hours of 9 am to 5 pm, Monday to Friday. Or simply complete our simple quiz here and a protection adviser will call you back to discuss your needs further.