Who inherits your business debt if something happens to you?

For the majority of small business owners, the bulk of their wealth is often locked up in their business.

The business generates their income to pay the rent, pay the mortgage or even the wealth to build the investment portfolio for retirement.

A business owner's ability to actually retire is usually directly linked to the success and stability of their business and their own ability to continue to earn an income.

But what happens to your business debts (and even family debts) when a person unexpectedly passes away?

Read in this article

The downside of business debt

Most businesses in order to start or expand will have to use some form of borrowing and debt as a tool for growth. Because business loans and mortgages are usually substantial, they require a personal guarantee from the directors and are usually directly secured by their own homes.

• A director's personal guarantee means that a loan is secured by the personal assets of the director(s) - usually their home.
• Businesses with multiple directors and partnerships usually carry joint personal guarantees so their assets are jointly securing the business risks

Important: These guarantees are not automatically extinguished until the loan is paid out in full or revoked by the bank or creditor.

This means upon the sudden event of the death of the guarantor, the guarantees and loans do not die at the same time but require payment upon demand by the creditor.

The obligation to repay is inherited by the other director guarantors or your family at the most stressful time of their life

Definition of an At Call Loan

Business debt insurance is the simple solution to this problem and can remove the worry and financial hardship that these unexpected events cause.

• Guarantor Protection insurance can ensure that upon the death or total and permanent disability of a loan guarantor, the debt can be fully repaid (or depending upon your personal situation substantially reduced) from the payout of the policy.
• While the primary benefit is to protect the loan guarantor and his or her estate and personal assets, guarantor protection insurance can also benefit the surviving business owners by removing or reducing the business debt, at a time of significant stress for all families and directors involved.

John and Julies Story: As Julie and her two young children said farewell to their husband and father on the day of his funeral, they had no idea that their pain and suffering was going to get worse.

John was the victim of the Christmas Road Toll. Road accidents claim the lives of 1,000+ Australians each year. He had grown the business to the point where his family enjoyed a stable financial life and all the trappings that go with that. As with many small business owners John took out a significant loan and gave personal guarantees to vehicle and equipment leases while not fully understanding the ramifications of what those personal guarantees meant for him, and his family.

John's business debts did not die with him, as many people think is the case.

• His estate became immediately liable for all business loans.
• The bank demanded repayment of the full debt in 30 days.
• As a result, Julie was left with insufficient funds to discharge the mortgage over the family home and was forced to sell the family assets and eventually their home to repay the loan or risk it being seized by the bank outright and subject to a firesale price.

Had John listened to his accountant and financial adviser and taken out Personal Guarantor protection insurance, he could have provided the financial security for his family that he always intended them to have.

Pro Tip: Some people think that banks foreclosing on people's homes is harsh. But remember that in a commercial loan arrangement, the bank or lending funder will expect that in commercial arrangements you have your own insurances or plan in place to safeguard your responsibilities, regardless of the situation.

As a business owner you need to take a protected commercial position to safeguard your family from the business risks.

Contact us today and we can help you do that.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.