Following the demise of Mr Tan, Mrs Tan is now facing troubles. She has received a letter of demand from the bank claiming $5,000,000 from the estate of her late husband. She feels helpless and at a loss for solutions: Where does she find the money to repay the claims by the bank? Should she even pay? Should she sell the house to make the payment? Confused and frustrated, she blamed her husband for leaving these loose ends. To worsen the situation, she is a full-time housewife and her two children are currently pursuing their tertiary education in London.
Before his passing on, Mr Tan was a shareholder and director of a manufacturing company. The company took a loan from the bank and Mr Tan acted as personal guarantor for the loan. The company was able to make regular repayments to the bank based on the business generated. Two years ago, Mr Tan was diagnosed with cancer. The business slowed down and repayments became irregular. Upon Mr Tan’s death, the bank asked the company for full repayment in view of the default in payment. The company couldn’t make the repayment and the bank decided to make the claims on the estate of Mr Tan.
The above scenario could happen to any business owner. However, business owners have a tendency to adopt an “it-will-never-happen-to-me” attitude. Many companies take up bank facilities for working capital and to purchase fixed assets; with the business owner acting as guarantor. Statistics have shown that the number of businesses that collapse due to the death of the key shareholder far exceeds those that succeed. Indeed, business owners never “plan to fail”. They, like Mr Tan, simply “fail to plan”.
Do you find yourself in a similar situation as Mr Tan as a business owner? These are five compelling reasons why you should have Credit Protection Planning as part of your business plan today:
#1: Discharge responsibility of guarantor in the event of claims made by Financial Institution.
When the guarantor of a business loan passes away suddenly or is totally and permanently disabled, the lender of the loan may demand repayment of the outstanding debts owed in full, and sometimes immediately. The financial institution may request that the borrower company provide a replacement guarantor; failure in which the financial institution may withdraw credit facilities partially, leaving a smaller credit line or worse-case, withdraw credit facilities totally, leaving no credit line.
Credit Protection Insurance prepares the funds necessary to make repayment when the guarantor dies or is totally and permanently disabled. The financial institution is not likely to make demands for full repayment if they are aware of the new funds from the insurance.
#2: Address claims arising from other lenders.
Banks are not the only lender; others may include any individual, company, fellow shareholders and directors. In the case of the business owner’s sudden demise, what do you think will be the reaction of the lenders?
If there is a contract with a fixed repayment schedule, the lenders will not be able to take any action. But if there is an existing clause for early termination of contract, the lenders are likely to bring forward the repayment.
Loans from directors or shareholders often does not have fixed terms of repayment. It is repayable upon demand. In these cases, the loan may be demanded for repayment and this will cause adverse cash-flow issues for the company.
Hence with Credit Protection Insurance in place, it can provide funds needed to repay the directors or shareholders when they demand for payment.
#3: Give confidence to suppliers and creditors of the company.
Suppliers and creditors may request for repayment of outstanding dues or may enforce shorter credit term and hesitate to do business with the company. With Credit Protection as part of the business continuity plan, suppliers and creditors are more reassured to continue the relationship.
#4: Continued existence of the company.
The insurance proceeds and the support of the bankers and lenders help the company to convince other employees and business associates of the business’s continuity and sustainability.
#5: Protect estate of the deceased business owner.
There will be no delay in the probate process as the bankers are unlikely to take any action against the estate. Credit Protection Planning ensures that funds are available to pay off the outstanding debts and in turn, protects the personal assets of the deceased business owner who also happens to be the guarantor.
With Credit Protection Insurance providing the funds necessary to settle credit facilities, it is a win-win situation for the company and the guarantor.
- For the company, the insurance proceeds will put itself in a better position financially and at the same time, eliminate the deadly threat of adverse liquidity.
- For the deceased guarantor, the insurance proceeds will discharge the guarantor’s responsibility and protect his personal estate.
Remember: Debts must be repaid. It is whether the debts are repaid when the guarantor is alive or upon the death of the guarantor. Business owners who have acted as guarantors to the debts of the company must protect their loved ones by putting in place Credit Protection Planning. Speak to your consultant today to find out more.
