Tips on how to protect your business in Hong Kong

This article provides investors with tips on how they can protect their business in Hong Kong.

SMEs are Important to the Hong Kong Economy
While the spotlight usually goes to big names who hire 1000+ employee in their operations, Small and medium enterprises (SMEs) in fact make up the largest part of Hong Kong businesses and are the territory’s biggest employer as a whole, providing jobs for over 1.2 million people.

According to Trade and Industry Department of the Hong Kong government, there were approximately 300,000 SMEs in Hong Kong as of March 2013. SMEs account for over 98% of the total business units and amount to nearly half of Hong Kong’s total private sector employment.

In Hong Kong, SMEs are defined as businesses that have a relatively smaller number of employees – fewer than 100 for manufacturing companies, and fewer than 50 for non-manufacturing. In Hong Kong in particular, family businesses involving 10 people or less are very common.

Business Loan Protection for Small Businesses in Crisis
In order to grow and develop a strong business, loan services provided by banks to smaller businesses are crucial. One common type of loan for small- and medium-sized businesses is often subject to repayment immediately upon the death of a certain “key individual.”

While often the CEO or president, the key individual may be anyone whose death or incapacitation could cause serious financial or business issues. If a company’s key individual suddenly passes, is taken with a critical illness or disabled in any way, there may be a large financial burden placed on the company.

In such an event, the bank can require repayment of the loan in full, leaving an unprepared company with significant financial difficulties.

Alternatively, a company director or board member may provide financing from his personal account. In cases such as this, the death of that individual would also pose a problem to the business. Situations may vary, but typically speaking, the director’s estate is legally entitled to demand immediate repayment of the balance of any outstanding loans.

Accordingly, business loan protection becomes a very important consideration for small enterprises to consider. When applying for a business loan, the ability to cover recurring payments is only one consideration - emergency repayment ability also needs to be taken into account.

Small- and medium-sized companies should consider insuring the key individual using a protection policy with the company as the beneficiary. Business loan protection is meant to provide the company with the necessary cash sum to repay a loan upon the death or debilitating illness of a specific employee.

Case Study: Death of a Key Business Director of an SME
The following example depicts a scenario in which business protection was successfully used:

Mr. Wong was the managing director of an engineering company. He was the key figure and driving force of the business.

Last year, he needed to raise US $600,000 to purchase new specialised equipment. The bank was willing to lend this sum to the company over ten years on an interest-only basis.

The bank stipulated that the loan would have to be repaid immediately if Mr. Wong were to pass away within this ten year period. Mr. Wong decided to take the loan. To provide the necessary protection in the event of his death, the company took out life insurance coverage of US $600,000 over a term of ten years.

Unfortunately, shortly after taking out the loan, Mr. Wong died suddenly from a serious illness. It took a large toll on the company’s operations, and in the midst of all of the ensuing turmoil, the bank requested full repayment of its loan.

The company claimed US $600,000 from the insurance policy it had taken out and repaid the bank in full. Due to its foresight in seeking business loan protection, the company was able to stay afloat during this troubled time, providing a stable work environment for its remaining employees.

If the company had not had business loan protection in place, they would not have had enough liquid funds to repay the loan.

In addition, due to the loss of Mr. Wong, they would not have qualified for another loan. Their only method of raising the necessary capital would have been to sell a number of the company’s assets quickly, likely well below market prices. In turn, this could have led to restructuring and downsizing.

While these may be unpleasant circumstances to consider, they can seriously impact business operations, as well as the people that directly and indirectly depend on the business for their livelihoods. With this in mind, business loan protection is a step all SMEs should consider to safeguard their futures.