Not everyone is fortunate enough to have excess funds stashed in their bank account to start or expand a business.
This is why; the majority of entrepreneurs choose to take financial assistance from lenders in the form of business loans. This decision too, sometimes, backfires as not all lenders feel confident to approve loans from entrepreneurs with ‘yet-to-prove’ businesses.
So, what is the solution for entrepreneurs who were denied a loan by their preferred lender?
Well, they can use term life insurance as collateral while applying for a business loan.
What Are The Benefits Of Using A Life Insurance Policy As A Business Loan Collateral?
There are many benefits in store for you when you choose to cover your business loan with life insurance.
Some of them are as follows –
- It becomes easy for one to run an enterprise when their primary partner or founder dies or falls ill thus interrupting the cash flow to the business.
- It allows one to get their hands on quick financial support thus allowing one to continue running the enterprise if their lender won’t offer financial aid due to unavoidable reasons.
- It allows one to pay off outstanding debts to their lenders.
- It allows one to cover personal expenses or cover emergency expenses for their top employees in case they do not have excess cash in their bank account.
- It can be used as a personal guarantee while taking out a business loan.
Which Type Of Life Insurance Will Work Best As Business Loan Collateral?
As per the opinion of experts, both term life and permanent life insurance policies can be used as collateral while taking out a business loan.
However, one must remember that the rates of term life insurance would be cheaper compared to the rates of permanent life insurance especially when you will cover your business loan with life insurance.
How A Life Insurance Policy Is Used As Business Loan Collateral?
Lenders refrain from offering a loan to the owner of a new business as they are unsure whether the business would make enough money that would allow the borrower to repay the debt + interest.
However, when one applies for a loan and it is sanctioned, the lender will assign a debt repayment plan for the borrower which will span for several years.
But, what will happen to the debt if the borrower dies before the same is repaid to the lender? Well, this is why; lenders make borrowers assign collateral for the loan, especially when it is a business loan.
One can choose to assign the payout of their life insurance policy as collateral for the business loan.
All one would need to do is apply for a life insurance policy, sign a loan collateral assignment form and place the name of the lender on the form as the recipient for the payout of the insurance policy.
The next steps will be worked out between the lender and the insurance company. In the meantime, one would have gotten their hands on the cash they needed in the first place!
Most entrepreneurs don’t even know that they can use life insurance as collateral and get their application for a business loan sanctioned in no time. However, since it is a path less taken, it is strongly advised that entrepreneurs seek assistance from a financial advisor before taking this decision, for the best results.