How Small Businesses Can Use Life Insurance as a Business Asset

Small business owners that have previously borrowed money can attest that actually being capable of repaying the loan is the core of credit worthiness. They can also attest that the approval process significantly hinges on how risky the applicant appears.

That said, credit worthiness isn't as simple as the term implies. There are actually many rather complex variables involved.

First of all, just because a new business has a seemingly valuable potential doesn't mean things always pan out. In fact, new businesses are often notorious for failing to live up to expectations. A business may launch with an innovative concept, but will usually find that the road from concept to profit is long and hard. It's also during the initial stages of a business where the owner is trying to figure out and reach their target market, a process that takes time and money when profits are at a bare minimum. This is a common reason that many business owners find themselves unable to make their loan payments.

When determining the credit worthiness of a business owner, lenders also commonly look beyond just how balance sheets add up. For example, the lender might look at intangible aspects like community leadership and ties, reputation, and character. This might include the lender investigating whether or not the business owner has a history of reliability and timeliness when paying off past financial obligations and how past relationships with the lending institution turned out. All of these factors will help determine whether or not the business owner is granted the loan.

One way to prove credit worthiness outside of the above, is by owning a life insurance policy, as this can show that the business owner has a financial commitment to his/her business and values that commitment. In the eyes of the lender, the life insurance policy means that the business owner has left a viable way for their beneficiary to follow-through with any financial obligation to them.

When a life insurance policy is bought through the business, it makes it a business asset, and like any other business asset, the life insurance policy will become part of the balance sheet that lenders will look at. If a portion of the life insurance benefit is assigned to the lending institution, then the insurance can also be used as loan collateral. As far as loans go, the cash value of a life insurance policy is another useful tool. The cash value can be a guarantee against defaulting, as it can be borrowed against for payments.

In fact, the cash value of life insurance policy can actually serve several purposes for the business. Borrowing against it is quick and doesn't require the business owner to get approved for a loan. Borrowing against a life insurance policy is tax friendly and the cash value usually accumulates in a tax-deferred status, meaning that there aren't any earning taxes while the policy is active. In most cases, a withdrawal (not surpassing the amount of paid premiums) aren't subject to taxation. In the event more money is needed than has accrued in cash value, the business owner can usually borrow against the policy without triggering a taxable event.

For more information, feel free to Contact Neptune Financial to schedule an appointment.

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