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Ready access to financing is the lifeblood of most small businesses. Yet the National Small Business Association (NSBA) reports that many small business owners are not getting access to the credit they need. According to the NSBA’s 2013 Mid-Year Economic Report, “Today, just 65 percent of small businesses report they are able to obtain adequate financing, down from 73 percent just six months ago.”
In today’s still tenuous economic recovery, many bankers are reluctant to fund any loan that has unwarranted risk. “They’re looking to lend to small business owners with rock-solid financials,” said Patrick DiCerbo, CFP®, MSFS, financial representative with Northwestern Mutual in Latham, NY. “In a very real way, the old adage that banks lend you money only when you can prove you don’t need it is true.”
That doesn’t mean securing a cash infusion is impossible, however.
Lenders look at a number of factors when deciding whether to provide financing. This includes the obvious: your balance sheet, amount of time in business, overall track record and general stability. But as DiCerbo pointed out, creditworthiness is about more than numbers. “Character, trustworthiness and personal history are also important. Lenders want to make sure that you (and any partners or key managers you may have) are responsible and won’t run from your responsibilities.”
Fortunately, there’s a simple way to increase your reliability as a business owner and boost the attractiveness of your loan application—and that’s by owning permanent life insurance. According to DiCerbo, permanent life insurance can enhance your creditworthiness and provide options for your business in the following ways.
1. Permanent life insurance is a business asset. “Permanent life insurance builds cash value over time. That cash value becomes part of your balance sheet,” said DiCerbo. “If a lender is on the fence about your loan application, your policy’s cash value may tip the balance in your favor.”
2. Its cash value can be used as collateral. Many banks will accept the cash value of a permanent life policy as security for a loan against the possibility of default. To do this, you must assign the benefits of your life insurance policy to the lender. “That way, if you don’t repay the loan, the lender can access the death benefit or cash value of the policy to satisfy your debt,” said DiCerbo. Of course, when you repay the loan, you regain full rights to the life insurance policy benefits.
3. It can also serve as an “in-house” line of credit, providing a source of ready cash in emergencies. Rather than dealing with a bank, you go directly to your insurance provider to borrow against your cash value, without any hurdles or delay. But keep in mind that failure to repay the policy loan and interest will reduce the death benefit paid to your heirs, reduce the policy’s cash value and, in time, could cause the policy to lapse with tax consequences.
4. It provides ready liquidity in the event of your death. When your business has permanent life insurance, lenders know that you’ve taken steps to plan for liquidity should something happen to you. This liquidity can benefit your business, partners, employees, creditors and/or family, depending on how it is structured.
Bottom line: Owning permanent life insurance as part of your business strategy offers a tangible way to show lenders that you value your responsibilities to your business, your creditors and your family. “If you decide to apply for a loan, don’t be discouraged if you don’t get an immediate ‘yes.’ A ‘no’ doesn’t necessarily mean ‘no way,’” concluded DiCerbo. “The more you can do to demonstrate your creditworthiness, the greater your chances that you’ll secure the funding you need to help your business grow.”
The Northwestern MutualVoice Team is a group of professionals who share insights and opinions from experts and industry leaders across the enterprise. Our vision is to inspire others to take action and plan for their financial future through topics ranging from financial planning, retirement planning and distribution strategies, wealth accumulation and preservation, to leadership, philanthropy and innovation.
