Article Licenses: CA, DL, unknown, unknown, unknown, unknown
Advisor Licenses:
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 require collateralising a spouse’s co-owned assets, 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 the leniency shown to previous owners or administrators.
Eliminate 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, win back ownership, and discharge any personal assets liens.
What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy for each principal business owner and key persons. CI insurance could pay off a considerable bank debt if one were to experience a significant illness such as a heart attack or stroke. One could become incapacitated and 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 debt-paying influence of that owner.
Publisher's Copyright & Legal Use Disclaimer
All articles are a legal copyright of Adviceon®Media and are for educational
purposes only. The particulars contained herein were obtained from sources
which we believe are reliable, but are not guaranteed by us and may be
incomplete. This website is not deemed to be used as a solicitation in a
jurisdiction where this representative is not registered. This content 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 website 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. The information provided
is general in nature and should not be relied upon as a substitute for advice
in any specific situation. 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.
Life Insurance and Segregated Funds Disclaimer
Life Insurance policies vary according to contract terms. Please read any
Life Insurance policy contract provided, or the segregated fund summary
information folder prospectus before the time of purchase. Full details of
coverage, including limitations and exclusions that apply, are set out in
the policy of insurance. Commissions, trailing commissions, management fees
and expenses may be associated with segregated fund investments which may
not be guaranteed and their market value changes daily and past performance
is not indicative of future results. A description of the key features of a
life insurance policy, a segregated fund; and any applicable individual
variable annuity contract is contained in information provided by the
company from which it is purchased. Talk to your advisor before making any
financial decision. For specific situations, advice should be obtained from
the appropriate legal, accounting, tax or other professional advisors. The
information provided is accurate to the best of our knowledge as of the date
of publication and is general in nature, intended for educational purposes
only, and should not be relied upon as a substitute for advice in any
specific situation. For specific situations, advice should be obtained from
the appropriate legal, accounting, tax or other professional advisors.
Rules and their interpretation may change, affecting the accuracy of the
information.
