Credit Uses of Life Insurance

Credit is important for virtually every business. The connection is clear and direct: The company with a better-than-average credit standing enjoys a better-than-average advantage in the ongoing pursuit of continued success and a strong bottom line.

Lenders want to lend their money, but they want to do so with the least possible risk. The only thing lenders care about is the borrower's ability to pay back the loan.

This is why lenders are often skeptical about working with business owners. Many live perpetually on the financial edge, balancing income and expenses on the thinnest of margins. Lenders know this, which is why they tend to view loan applications from business owners with a skeptical eye.

When you apply for a loan, the lender looks at a number of factors. These include your balance sheet numbers, as well as how long you have been in business, the company's overall track record, and its general stability.

The financial numbers have to add up. This helps the lender decide if you get the loan, how much you get, and what interest rate you will pay.

Character Counts
However, the numbers aren't the only criteria. Character counts. Crucial to the decision on loan approval and favorability of terms is your reputation as a dependable and reliable individual. All other elements aside, does the lender have confidence in you as a capable business manager who honors your financial responsibilities? There are many ways to demonstrate your credit worthiness — length of time in the community and your ongoing relationship with the lender are just two.

The presence of life insurance can also play an important role in helping you secure a line of credit or loan. Cash value life insurance owned as an asset on your life can enhance your credit worthiness in several ways:

• It provides tangible evidence that you appreciate your responsibilities to your business, to your creditors and to your family. Even though ownership of life insurance may not be directly related to the loan itself, its presence can enhance your credit standing.
• It is a bona fide business asset, with the cash value listed on your balance sheet. The mere presence of, say, $100,000 in cash values on your books may be what it takes to tip the scales in your favor.
• It can be used as collateral for a loan. You can assign all or a portion of the death benefit to the lender. Or you can take out a policy specifically for purposes of securing the loan. This guarantees that the debt will be repaid if you die. Also, if cash values are present, they can be collateral to secure the loan against the possibility of default.
• It can serve as your company's own private, in-house line of credit. Policy loans of cash value from your insurer can serve as a valuable source of credit and can do so without publicity or the need to obtain a loan approval. (Note: A policy loan, if not repaid, can directly reduce the death benefit payable to beneficiaries.)

Life insurance can also directly help your successors in the event of your death.

Case Study:
Sam is the founder and president of Willit Run Enterprises. The company grosses $500,000 a year. Sam has five employees, two of whom are family members who are his designated successors. At age 57, Sam collapses and, within minutes, is dead of a massive heart attack.

The company suffers an immediate and direct loss of business attributable to Sam's death. His heirs must now try to save the company. The successors, though capable, are still untested, so working credit from suppliers slows to a trickle. The bank has given notice that it may call in its $135,000 demand note. Meanwhile, nervous customers are walking away or waiting to see if the company survives. Business is down 50% within two months.

Fortunately, Sam had the foresight to protect the business and his heirs with adequate insurance on his own life. As a result, not only is his widow properly cared for, but his successors in the business received more than $750,000 in death benefits. This money was available immediately to repay any "nervous nellie" loans from creditors and, most of all, to buy time for the heirs to stabilize the business.

Thanks to the cash from Sam's life insurance policy, the company not only survived, but had enough money to expand. Within five years, the company that had nearly died with Sam had doubled in size.

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