When business owners take out business loans, they agree to make regular payments – but what happens if they can’t? Even if the business is thriving, unforeseen circumstances like illnesses and injuries may cause business owners to default on their loans, which can be financially ruinous. The good news is bank loan disability insurance can provide a safety net.
Business Loans Are Common
Starting and growing a business requires a significant investment. Many business owners have the vision and drive but lack the cash – meaning they need to secure financing.
Fundera says 43% of small businesses applied for a loan last year and 70% have outstanding debt. The average small business bank loan is $633,000. Securing enough funding is critical – 29% of small businesses fail because they run out of capital.
Disability Can Derail Repayment
Banks aren’t in the business of giving money away for free. When they fund a loan, they want to receive their investment back, plus interest. To avoid taking unnecessary risks on bad debts, they use an underwriting process that considers the applicants business plan, credit history, and income, among other things.
A business owner only succeeds in securing a loan if the bank determines there’s a good chance the business owner will be able to make repayments. Nevertheless, repayment is never a guarantee – unforeseen events can prevent business owners from making regular payments. Many times, those unforeseen events involve a debilitating illness or injury.
Most small businesses depend on the hard work of the owner. If the owner can no longer work due to a disability, the small business may be unable to bring in enough revenue to keep up with bank loans. This is true for many different types of business. Imagine the following scenarios:
- The owner of a small hair salon falls on ice outside her home and injures her back. As she can no longer stand long enough to cut hair, she has to stop seeing clients. There are two other stylists at the salon, but with the owner out of commission, revenue drops by 33%. Meanwhile, rent, banks loans, and other costs stay the same.
- A dentist has a heart attack and needs to cut back on work during recovery. He owns his own practice with a receptionist and a dental hygienist but no other dentists. It’s now impossible to take on as many clients as before. He can’t afford to keep his business running and pay back his bank loans.
- A baker runs a one-person bakery that specializes in wedding cakes and other special desserts. She is diagnosed with cancer and struggles to work while undergoing chemotherapy. She doesn’t have any employees to pay, but she does have bank loans – and now she doesn’t know how she’ll repay them.
How a Business Loan Default Works
According to Experian, a loan typically goes into default after three to six months of nonpayment, but default may occur faster depending on the terms on the loan. When a loan goes into default, the entire loan amount may be due immediately. The bank may seize the business’s assets to recover the value of the loan. If the business is a sole proprietorship or the business owner used his or her personal credit to secure the loan, defaulting may impact the individual’s personal assets and credit score. The business’s credit score will also take a massive hit.
All this makes recovery difficult. Imagine a business owner has to take a year off to deal with a health condition. During this time, she defaults on her business loans and her credit scores plummet. When she’s feeling better, she wants to restart her business, but the previous default means she can’t secure the funding necessary to do so.
Business Loan Disability Insurance Offers a Safety Net
Business loan disability insurance can give business owners peace of mind and provide financial protection in the case of a disability. If the business owner experiences a qualifying disability, the policy covers the required bank loan payments. The benefit period will cover the full financial obligation.
The following resources can help you support your clients in securing business loan disability insurance:
- The Business Loan Disability Insurance Product Sheet
- The Business Owners Toolkit
- The Bank Loan DI Case Study
- 4 Reasons Your Clients May Need Business Loan DI
- Are You Offering Bank Loan Disability Insurance?
- How to Protect Business Owners with Bank Loans
Do you have questions about business loan disability insurance? DIS is here to help. Contact us.