Standby Credit

Standby Credit
When discussing the need for insurance to underpin the guarantees for a buy- sell agreement , one of the most common objectives thrown back by the business owner( or the owner’s advisors) is that the survivors” can simply borrow the money needed to close the purchase”
The following idea is so effective in countering this objection and steer the discussion and elicit a positive response

1. Most will agree with the statement that the loss of a key person (and shareholder) of a company will have a negative, not positive, impact on the creditworthiness of the business. In fact, sometimes lenders will ask for a reduction in the debt outstanding as a sign of good faith by the business owners.
What might be prudent then is for the business- while on a stable financial footing and with all shareholders and key personnel in place- to negotiate a standby line of credit facility to be available should a triggering event occurs, as addressed by the buy- sell agreement.

2. A standby credit facility is a renegotiated access to a specified loan amount. The funds are available on demand by the business at any time (as covered by the agreement)
Because a lending institution must set aside from other lending the amount of the standby credit facility, they normally charge a nominal amount on an annual basis- usually 1 percent to 2 percent. It is also normal for the credit facility to be reviewed by the lending institution from time to time to make certain the quality of the credit is still adequate and acceptable. WHAT THEY DON’T DO IS REVIEW THE CREDITWORTHINESS AT THE TIME THE LOAN IS CALLED FOR
To establish this facility on behalf of clients and companies, you can offer a very unique product for their consideration
Just the bank, there will be a detailed review at the outset of the business and the owners, and the annual cost will be around 1.5 percent of the amount of the credit facility. But there are some differences, too and theses are all in favor of the business. The facility never has to be revised again once granted, and the annual charge is guaranteed never to change or to be renegotiated.

3.The advantages and uniqueness becomes apparent at the time the line of credit facility is drawn upon. First of all, some of the annual payments are refunded along with the credit advance. But the best part is that once the credit facility has been paid out, the arrangement is closed, and no repayment is required.
At this point, the owner and advisor are usually scratching their heads” what kind of loan is this anyhow?” comes the often asked questions
“This is how life insurance works” the partial refund of the annual fee is the cash option or paid up addition of a whole life policy