Our small business online advice columnist. If you have substantial cash surrender value in a life insurance policy you can usually borrow up to that amount from your insurer. Ordinarily, you would borrow against the policy and then re-lend the money to your business at the same interest rate. The business can then take an interest deduction on the loan and you do not earn taxable interest income on the transaction. When you borrow against your own policy, you are not obligated to repay the loan principal, only to pay interest on the loan.
Interest is typically due on an annual anniversary date.
Most policies will allow you to simply add the accumulated interest to the principal, as long as you have not already borrowed up the cash surrender value of the policy. Of course, borrowing against your own policy means the eventual death benefit of the policy will be diminished by the amount of the loan, plus the loss of interest. As a source for loans that are not secured by an existing policy, insurance companies are not usually viable sources of financing for small businesses. Although insurers actively seek investments for unused premium income, the companies tend to invest in larger, established businesses. If you have available security, such as real estate, insurance companies may provide some limited possibilities.