Article Licenses: CA, DL, LI, UK, US
Compliant content provided by Adviceon® Media for educational purposes only.
How banks view lending money to business owners.
Banks follow established rules, which include asking a business owner to collateralize a loan, not just with business assets, but also with personally owned assets, such as a principal residence and cottage. Collateralization can include requesting a spouse’s co-owned assets to be collateralized, even if the business is incorporated.
Add to that a possible collateralization of any assets of a partner or adult child (and their spouses) who also share in ownership. Small business owners can lose their shirts if they default on a loan.
What if an owner dies? It is unwise to assume that a good relationship with the bank will continue if the heir of a small business, or a partner, is not in favour with the bank manager. Bank managers can change or apply strict policies while reassessing leniency shown to previous owners or administrators.
Eliminate any doubt in a family business, such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual life insurance policies. In the case of a non-family business, each owner/partner should be insured to cover the company’s debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and, essentially, win back ownership and discharge any liens of personally owned assets.
What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy on each of the principal business owners and key persons. CI insurance could pay off a considerable bank debt if one were to experience a major illness such as a heart attack or stroke. One could end up incapacitated and may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is sick and the bank manager loses confidence in the stabilising influence of that owner.
Legal Copyright Warning: Adviceon® retains all legal rights and copyright to the contents of this article, libraries and all media on this website. The unauthorized reproduction or distribution of this copyrighted work is illegal. Criminal copyright infringement, including infringement without monetary gain, will be investigated and may result in legal liability. Content is for online use with the original Internet url used and is only for educational guidance, and is not to be edited or reposted elsewhere, which is tracked online via by Adviceon®. Please read Agreement of Copyright Use & Legal Notice which applies to all who use this website with content provisioned for educational purposes only by Adviceon®. Email firstname.lastname@example.org
Publisher's Copyright & Legal Use Disclaimer Replication is prohibited beyond the use of this website. The publisher does not guarantee the accuracy and will not be held liable in any way for any error, or omission, or any financial decision or purchase or use of a financial product, including investment or insurance products, and suggest that a professional advisor’s counsel is sought, especially with regard to Segregated Funds which have investment risks. Not to be copied or republished as all rights are reserved by the publisher © Adviceon®
Website Disclaimer This website and information is provided for your general information only, and is not intended to provide specific personalized advice, including, without limitation, investment, insurance, financial, legal, accounting or tax advice; and any reference to facts and data provided are from various sources believed to be reliable, but we cannot guarantee they are complete or accurate; and it is intended primarily for Canadian residents only, and the information contained herein is subject to change without notice. References in this Web site to third party goods or services should not be regarded as an endorsement, offer or solicitation of these or any goods or services. Always consult an appropriate professional regarding your particular circumstances before making any financial decision.