Why it's crucial to survive the loss of key people in SMEs

As the number of start-ups rises in Singapore, getting an insurance plan to protect against the loss of a key person -- the owner, main revenue generator, or chief product developer of the business -- has never been more important.

For years now, Singapore has been actively building up an army of start-ups and small- and medium-sized enterprises (SMEs) in a bid to raise national productivity. All new SMEs in the city-state are encouraged to innovate and expand into businesses in the R&D, product development, branding, and marketing space.

A slew of national initiatives are already in motion to help new companies kickstart their businesses. For example, the Singapore government is expanding its start-up cluster at One-North, an area consisting of three building blocks to incubate Singapore-based start-ups in the first five years of their existence.

As a result, firm formation in Singapore has risen from 54,000 to 77,000 between 2010 and 2014, compared with closures of between 40,000 and 42,000 over the same period, according to Morgan Stanley.

Meanwhile, Singapore's rate of entrepreneurial activity, measured by the percentage of adult individuals who are trying to start or are already running an enterprise, jumped to 11% in 2014 compared to just 5% back in 2003, data from a 2014 survey of domestic entrepreneurs revealed.

Despite the number of higher value-add start-ups underway though, one in two SMEs is at risk of not being adequately insured against the loss of a key person, according to a 2014 survey by United Overseas Bank (UOB).

SMEs often rely on one or two individuals, who fund and direct the business and manage all strategic and tactical elements of the company's growth and development. Yet, UOB's survey suggests that should they lose one or more key employees, at least 50% of local SMEs risk not being able to replace them before running out of funds to stay in business.

Furthermore, if a key person has put up his or her own personal assets as collateral for a bank loan (such as personal savings for property), then the loss of this person would cause a pullback in funding.

According to UOB's survey, half of the SMEs involved believed it would take at least nine months for them to find a suitable successor to replace their key person in the current labour market.

Meanwhile, eight out of ten respondents admitted that they would 'lose revenues and face cashflow problems if they lost their key person'.

"We find that many small businesses tend to focus more on building their business rather than protecting it by managing the risks. The lack of awareness among small businesses to safeguard their company against risks such as the loss of their key person makes them vulnerable to financial failure," Mervyn Koh, UOB's Country Head of Business Banking for Singapore, said in a statement.

Despite reports that Apple spent $774,000 on key man insurance for their CEO, Tim Cook, protection of this kind need not be expensive – a few hundred dollars a month in some cases – and is well within the financial means of many SMEs.

In that light, it's probably a good idea to seriously consider a key man insurance plan to protect your business over the long term.