Financial planning: A quick guide for start-ups and entrepreneurs

In their early stages, start-ups can face a real assortment of obstacles and hurdles. From funding, financial stability and cash flow, to recruiting the right people and managing growth - you’ll often find business owners spinning plates.

However, there's often one thing that gets overlooked in the midst of all this: long-term financial planning and business protection. It's a fairly morbid thing to be thinking about death planning, especially if you've only been in business a handful of years, but it is an absolute must.

The fact of the matter is, if you want to ensure long-term stability and peace of mind, you must take the necessary steps to protect your business. The earlier you get plans in place the better! In this blog, we get some pointers from Gary Smith of Tilney Financial Planning...

Shareholder protection

Could you afford to buy out another shareholder in the event of their death?

• In simple terms, this ensures that in the event of a shareholder dying the reverberations are kept to a minimum. It acts as a safety net for your family, your business and all those who rely on it.
• Shareholder protection insurance will cover the value of your shares, and should the worst happen, the insurance is paid to the surviving shareholder(s) to enable them to purchase shares from the deceased’s estate.

Key Person Protection

Is there a person in your business who you are financially/commercially reliant upon?

• Many start-ups (especially in the tech and digital sector) are built around a focal person whose ideas, input or contributions are vital to that business. This could be an important designer, coder or inventor who plays a crucial role in driving your business forward.
• Key Person Protection will pay out a lump sum on the death or absence of that individual, meaning your company can use the proceeds to recoup lost profit or alternatively to hire a replacement.

Borrowing and loan protection

Could your family afford loan repayments if you became unable to work on your business?

• Loans and borrowing are commonplace in early stage businesses, but could you or your family afford repayments if you were unable to work due to an accident or illness.
• Our latest For Love or Money research found that half (49%) of business owners in the North East have property debt of £100k-£200k. Could your family afford to take on such debt at short notice?
• Because of the controversy surrounding Payment Protection Insurance (PPI), many banks will now not insist that you put life cover in place when you take out a loan. That said, it can be a welcome comfort if an accident prevented you from working on your business, covering repayment for up to two years if something were to happen to you.
• Business loan protection can cover everything from director loans, commercial loans and mortgages, venture capital loans, overdrafts, credit cards and personal guarantees.

Death in service

• Death in service can provide a tax-free lump sum of money upon the death of a director, shareholder or employee.
• Cover can often be taken out for as little as £20/30 per month and it offers protection for both you and your employees should the worst happen while working for the business.
• The pay-out is usually between 2 and 4 times your annual salary, and while it can't be assigned to a mortgage, your family could use it to pay down any mortgage debt.

• Relevant Life Trusts are also a useful method of providing death in service cover for an individual, with cover of up to 25 times remuneration often available.

Life insurance

Is your family reliant on your business and the income that you receive?

• Our For Love or Money research found that 67% of North East business owners agree that their ‘family is dependent on income from their business’ -  a worrying statistic however you look at it.
• Life insurance is an important way of protecting your family should you become ill or die prematurely. You should get professional advice before taking out any kind of insurance policy as there are certain caveats and considerations that must be made.
• Don't assume that because you have a death in service policy that you don't need life insurance – death in service is very inflexible in comparison to life insurance.
• It's normally recommended that this covers 10 times your current salary.

Lifetime cash flow forecasting

• Lifetime cash flow forecasting is a useful way of planning for the years ahead. It offers a clear demonstration of where your finances should be at certain stages of your life and enables you to plan ahead for your eventual retirement.
• Turnover and profit can be volatile in the early stages of business. Cash flow forecasting will help you to ensure you have the finances in place to pay for important life events including repaying your mortgage, funding children’s education and eventually retirement.

If you're a start-up or entrepreneur that wants to protect your business and ensure long-term financial security for your family get in touch with our office. We work in collaboration with Tilney, a leading, award-winning investment and financial planning company. We'd be happy to put you in touch with one of their financial advisors.