Dr. Steve P. is a 65-year-old physical therapist. He spends his free time fishing and enjoying the great outdoors. Two years ago, he was visiting his aging parents in Idaho. After helping them get their garden in, he drove to Idaho Falls, Idaho, to help his brother install a sprinkler system in their yard. Part way through, he began to feel tired and dizzy. Even after lying down for a while, the symptoms continued. His brother rushed Steve to the hospital where they determined he’d had a stroke.
Dr. Steve P. owns a physical therapy practice and has been in business for 36 years. His family relies on him for their well-being, as do several employees and their families.
A stroke can be very debilitating. In a worst-case scenario, the individual may never work again.
This could happen to anyone. What was the impact on their financial condition? Could cash flow support a temporary PT doctor and continue paying Scott and his wife to meet the business’s mortgage payment, plus other debt obligations?
In the landscape of modern business, safeguarding against unforeseen challenges is paramount. One such critical safeguard is Business Overhead insurance. Often overlooked by businesses, owners AND bankers, this form of insurance provides financial stability and continuity for businesses when key employees or business owners are unable to work due to disability. Let’s look at some of the benefits and why it should be an essential component of lending risk management.
- Financial Security and Stability
When a key employee or business owner becomes disabled (partial or permanently), the business can face significant financial strain on cash flow which can impede their ability to meet debt servicing along with essential expenses such as salaries, rent and utilities, which we all know get paid before your loan payment! - Protection of Key Employees
Key employees often possess skills, knowledge and relationships that are vital to the business’ success. Losing such an employee to a disability can be devastating. Business Overhead Expense insurance can cover the cost of recruiting and training a replacement which can be crucial to maintaining business continuity and sustaining customer/client relationships.
For many businesses, the absence of a key employee can halt operations and ruin business reputation and customer trust. Continuity is essential for long-term success, stability and debt servicing. - Safeguarding Personal Finances
Your borrowers often invest their personal savings into their businesses as well as guaranty your bank debt. Credit underwriting looks at individuals and guarantor’s financial capacity including liquidity. In the event of a disability, personal finances can be impacted if the business suffers, which could impact your secondary source of repayment. - Enhances Creditworthiness
As a banker, we are always looking to mitigate risk. Most bankers look favorably on a company/borrower that has a comprehensive risk management strategy. Having Business Overhead Expense insurance increases creditworthiness and demonstrates a bank’s proactive approach to mitigating the risk of having a non-performing asset. - Peace of Mind
Perhaps one of the most intangible yet invaluable benefits of Business Overhead Expense insurance is peace of mind, not only for your borrower but also for you as a lender. Knowing that the business is protected in the event of a serious disability allows the owner to focus on business growth, innovation and continuity, as well as fewer sleepless nights for you as the lender.
As a lender, your job is to lend money to credible borrowers who exhibit the ability to repay their loans. Too often, underwriting does not look at the risk of the owner/guarantor becoming disabled from a nonwork-related injury or illness.
Why doesn’t the bank’s checklist of questions include “Do you have business overhead expense insurance?” Don’t feel bad, 99% of the lenders I talk to have never heard of business disability insurance or how it can potentially save a good loan from turning into a risk-rated credit due to an unforeseen tragic event. It is your responsibility to make money for the bank by making good loans, but you also have a responsibility to educate your borrowers in an effort to help them be successful.
Business Overhead Expense insurance just might save the business in the event the owner or key employee has a disabling injury, accident or illness.
In an unpredictable world, having such insurance is not just a precaution; it is a strategic necessity for any business seeking success and resilience.
Not only can your lenders have a great discussion with your borrowers about how they can protect their business but they will likely be the only lenders in your town who have this arrow in their quiver. Believe it when I say that your customer will thank you forever if, like Steve P., they should not be able to work for an extended period.
By the way, Dr. Steve P. fully recovered and was back helping other people within a few months. He was one of the lucky ones, but now follows the saying, “Hoping for the best and preparing for the worst.”
Contact me if you would like more information or if you would like me to come on-site and help your lenders understand the nuances of Business Overhead Expense insurance.
Andy Phillips is a retired banker and longtime Montana resident living in Bigfork, Montana. He now spends his time helping banks and privately held companies with 401(k) plans, group health benefits, asset protection strategies and more! He can be reached at (480) 688-1011 or andy@benefitandfinancial.com.
Representatives offer products and services using the following business names: Benefit & Financial Strategies LLC — insurance and financial services; Ameritas Investment Company LLC (AIC), Member FINRA/SIPC — securities and investments; Ameritas Advisory Services (AAS) — investment advisory services. AIC and AAS are not affiliated with Benefit & Financial Strategies LLC.
