The mood of directors who took part in an IoD/Legal & General survey is upbeat, with predictions of rising profits and fears of a slide back into recession fading. But too many businesses seeking growth lack vital cover for unforeseen events. A widening range of insurance products could be their answer
With the economic outlook still unpredictable, it is vital that businesses protect themselves against unexpected events. A logical, low-cost means of making your business more secure is to take out insurance to safeguard and secure bank loans—whether personal or business—as well as other forms of borrowing.
But yet again in this Legal & General/IoD research, we find that there is a "protection gap" and that it remains at least as big as it was when a similar survey was conducted in 2009. In fact, by some measures, even allowing for a difference in the two samples, the findings suggest the divide is widening.
Where the responsibility for this issue lies is difficult to assess. The onus is on several parties, including the banks, investors, directors running businesses and the wider insurance industry. But of these groups it would seem clear that lenders—and according to the research that usually means the banks—have a duty to improve the way they encourage borrowers to think about protecting their business in the event of something unexpected happening to a key person.
The death or critical illness of a leading individual is a difficult issue for any business to cope with at the best of times and it's clear that these are not the best of times. But the range of appropriate insurance products is always expanding and borrowers should be made aware of the possibilities and directed towards potentially useful protection.
Business owners themselves should carry out a thorough audit
of their risks and exposures, considering any gaps in their own business protection plan that might need plugging.
Borrowing behaviour
Just under a third (32 per cent) of respondents reported having corporate debt. If replicated across the UK business landscape this would mean that 68 per cent of business is free of such debt.
It is possible that those without corporate debt have been unsuccessfully trying to raise it (for example, they may be being held back by a lack of access to debt finance) and equally that those with debt are keen to pay it back.
But it is obvious that a higher proportion of firms reported having no corporate debt in 2010 than in a similar survey conducted with British Chambers of Commerce members in 2009. As the profile of respondents, the research methodology and the wording of questions all changed from the 2009 survey, it would be dangerous to draw too many conclusions from this comparison.
Taking all the caveats into consideration, it is still possible that this research points to some evidence of what the banks have been arguing for some time. That many businesses-fearful after the credit crunch-have reduced their debt and are paying off existing borrowing rather than seeking new loans.
This speculative theory is supported by the fact that the sample of companies in the 2010 survey includes a higher proportion of larger companies. In both the 2009 and 2010 questionnaires larger companies reported a higher incidence of corporate debt.
In 2010, for example, 46 per cent of those employing more than 250 staff had some corporate debt. Had all conditions remained constant, this survey should therefore have been expected to report a rise in such debt. It is therefore interesting to note the drop in borrowing, particularly in the light of criticism of UK banks for not lending enough and the bankers' counter claim that many businesses are simply not keen to borrow, focusing instead on clearing their existing borrowing.
There would appear to be a squeeze on the upper range of start-up lending. Typical borrowing patterns in the survey suggest that firms are borrowing small amounts or substantial sums. There is not much activity in between £100,000 and £1m. Two-thirds of borrowing (66 per cent) was either less than £100,000 or more than £1m.
There are few surprises in the pattern of which firms are borrowing what, with smaller firms securing small amounts and larger companies sizeable sums.
Who's covered?
Fewer than half (42 per cent) of bank loans have some protection in place. This means that more than half (53 per cent) hold no such assurances. As might be expected, the likelihood of having safeguards is higher in smaller businesses. A further five per cent don't know what type of protection is in place.
Perhaps this lack of insurance cover shouldn't be a surprise considering that only 15 per cent of bank loans came with some insistence from the lender that a life assurance policy should be taken out. While such a policy was recommended in a further 22 per cent of cases, that left 57 per cent of loans where the bank never even mentioned life assurance protection.
For companies with older directors the issue was even less likely to be mentioned, with 63 per cent of those businesses, where the average age of directors was 51 or higher, saying the matter of protection was never even raised by their lenders.
And there is more evidence that the banks aren't overly concerned—or are worried for other reasons—about helping borrowers to protect their business, with the finding that 75 per cent of respondents claim that their bank never introduced them to a financial adviser.
In the event of loss
A third of respondents have not taken out cover to protect themselves or the business in the event of the death or serious illness of a key director or business owner.
In order to protect profits and the share in the business, 30 per cent hold both life and critical illness cover; 19 per cent have life cover only; and two per cent critical illness cover only. Despite this lack of protection, respondents clearly recognise the risks such a loss would pose to the business. A fifth (21 per cent) rated the prospects for the business surviving such an event slim, stating that they expected it would cease to trade. Understandably, given the fact that there are fewer people to take over, smaller firms were the most vulnerable, with 39 per cent believing the business would stop trading.
Across all respondents the most likely outcome of such an event (cited by 37 per cent) was that other business partners or directors would buy shares of the business. Only 14 per cent felt that beneficiaries would take an active role, while 11 per cent thought beneficiaries would sell to a third party.
Although they recognise the risks, well over half (58 per cent) have no formal arrangement to deal with this situation or cover such an event. And among the smallest firms this lack of preparation is even more evident, with 73 per cent of firms having no structure in place. On the more positive side, 35 per cent do have such arrangements, although the balance here is heavily weighted towards larger firms.
One mechanism for dealing with this situation is through articles of association, but 34 per cent haven't renewed articles of association or partnership agreements since their business was founded. Just over a fifth have done so within the last year, possibly due to recent updates of the Companies Act and no details were given of what those changes entailed.
Just what constitutes a key director is obviously heavily determined by the size and nature of the business, but there was a fairly universal agreement that managing directors were the most important individuals (perhaps this was no surprise since they were also the most likely directors to take part in this survey).
There was an even spread of how many key directors there are in a business with 23 per cent saying there was only one, but equally another 23 per cent selected five or more. Smaller businesses are obviously likely to have fewer key directors.
The impact of losing such a director would be difficult for many companies, but there is good news on how robust those running businesses think their companies are. A significant majority (58 per cent) expect their business would survive for more than two years after such an event. Sixty per cent of firms with fewer than 10 employees think the business would disappear within a year, while 98 per cent of those in firms with more than 250 employees believe the company would survive. Larger businesses have the momentum and personnel to keep going after losing a key individual.
Those with corporate debt are more confident of their chances of survival, but this would appear to be the result of a bias towards bigger firms among those with corporate debt, rather than some idea that debt makes a business more sustainable.
It is arguable that when used to finance growth, debt can lead to greater stability as the overriding message from these results is that bigger is safer or more secure.
Key findings
• Approximately a third of businesses (32 per cent) have corporate debt and those with 50 or more employees were the most likely (45 per cent) to have built up debt
• Under £100,000 was the amount of corporate debt mentioned the most often by respondents, but the amount varied by size of business
• More than two-fifths of respondents claimed
to have no protection for their corporate debt
(43 per cent)
• Bank loans form the highest share of corporate debt—on average 30 per cent of the total debt
• followed by overdrafts (18 per cent on average) and director loans (15 per cent on average)
• Just over two-fifths of respondents (42 per cent) with a bank loan claimed to have personal guarantees for it, but among businesses with fewer than 10 employees the equivalent figure was 64 per cent
• Life assurance was not recommended or insisted upon for almost three-fifths of respondents who had a bank loan (58 per cent)
Methodology
A printed questionnaire was sent out with the September 2010 issue of Director magazine. Responses were received during the month. The survey was also available online at the same time and a total of 533 responses were received, the vast majority (420) from the paper questionnaires.
Throughout this report references are made to the 2009 survey. But that research was conducted with members of the British Chambers of Commerce rather than the IoD and involved a different questionnaire format, although the questions were broadly the same.
Direct comparison between the two sets of results is therefore fraught with complications and where any conclusion has been drawn from changes in the findings, clear caveats are given to explain any potential misunderstanding.
For more information on how to protect your business click here
