For many business owners the statement “My business is my biggest asset” would be true. It would therefore make a lot of sense to spend some time on methods a business owner can use to protect his/her business.
In most businesses there are people we call key persons. These are people who’s absence, due to death or disability would have an adverse effect on the profitability of the business.
They have specialised skills and they play a key role in the operation of the business. Owing to their scarceness they are not immediately replaceable from within the business. To replace them would take time with an even worse effect on the profitability of the business.
The loss of such a key person would therefore have a double negative effect on the business: profit would decline and the business would have to incur the added expense of recruiting a replacement.
It therefore makes a lot of sense for the business to insure such a key person’s life against death and disability. With such an arrangement the insurance policy would pay out upon the death or disability of the key-person in the hands of the business. The business would then be able to use these cash resources to tie it over until a suitable replacement has been found.
It is sometimes cheaper and/or more convenient for a business owner to borrow money from his/her business. A debit loan account is then created in the books of the business. This places an obligation on the business owner or his/her estate to repay the loan to the business.
If the business owner becomes disabled or dies, it raises the risk of the business owner or his/her deceased estate not being able to repay the loan to the detriment of the business.
To protect the business from such risks the business owner can insure his/her life against death and disability. When any of these events occur the insurance policy will pay out to the business owner or his/her estate. These funds can then be used to repay the loan to the business.
The 1-2-3 of Business is an analysis instrument, created by Sanlam, that helps business owners to identify and quantify financial risks like those discussed above, and other similar risks.
To make use of this business tool, call 0860 100 539 or send an e-mail to firstname.lastname@example.org
Article written by Kobus Engelbrecht, Marketing Manager, Sanlam Personal Finance
Copyright © Sanlam, 2016