June 21, 2018 No Comments

Business Risk Insurance

Business risk insurance is an important part of managing the financial risks.  As a business owner, you know what it takes to build a business and what’s even more important, to build a profitable one.  New Zealand is made up of  97% of small business owners who employ 20 staff or less and 70% of them are single worker businesses and that 25% of small businesses fail in the first 3 years. I’d like to make a point here and that is most of our small business owners are single worker businesses which mean no one else is creating income for that business except the owner.  I wonder if that directly correlates to the business failures where the business owners are unable to work, but the expenses keep coming in and there is a lack of cash flow.  This is where business risk insurance may have helped.

What causes lack of cashflow?

There may be several reasons why businesses experience a lack of cash flow.  It could be your business is burning more than it’s earning and needs to be reviewed, it could be that that bank does not want to support your venture anymore and pulls the overdraft, or you’re maxed out on your capacity to borrow through lean times, maybe your business is seasonal, or you’re not currently able to work in your business because of sickness or accident. Whatever the reason for running out of cash flow, you need to plan for it and decide at what point do you make changes or implement a plan to mitigate any of these reasons.  Sometimes when I assess business risk I use something I learned from a software developer, it’s a simple software programming statement IF, THEN, ELSE.  IF this happens, THEN I do this, or ELSE I do this. Here are a few examples;

  1. IF my bank won’t lend me any more money, THEN I look for a business capital partner or ELSE I reduce fixed expenditure.
  2. IF my business partner wants out, THEN I look for another business partner, or ELSE I extend my lending.

Your business may not be that simple but it does help you think about the THEN and ELSE because the IF will happen in your business at some stage.

Acceptance of Risk

Since you are in business, you have already accepted some form of financial risk, but you do not have to carry 100% of the burden of risk, and there are some risks you can pass on to a third party using business risk insurance, such as a well thought through Business Expenses/Overheads plan to pay for your business expenses when you can’t work in your business. Imagine for a moment, what it would be like to have someone else pay for your business expenses until you can return to your duties.  A well thought through Business Overheads plan can pay for a lot of your business expenses such as;

  • Your business loan interest or rent
  • Wages for admin staff and non-income producing employees
  • Insurance premiums
  • Rates and electricity
  • Lease expenses

These are just a few of the expenses an insurer will pay for you when you can’t work in your business due to sickness or accident and it’s paid on top of any personal ACC Payments you get (if any).  How much less stress on your business cash flow would this be, if someone paid these expenses for you, especially if your business loan is secured against your family home, is that worth risking.

The owner needs to sell?

I have seen this before several times in local newspapers.  I’m paraphrasing here but I have seen ads which go like this “Owner needs to sell due to ill health” Firstly, I would fire whoever put that ad in the paper, that just wreaks of fire sale and what I see is “make an offer I’m desperate, I will just about take anything”. I don’t know the reasons why these businesses were selling or failing, and I feel for any business failure.  Maybe there was only a failure in planning and passing on some risk, and the business need not have failed completely.

Explore your options

Business risk insurance in the form of Business Overheads cover is not expensive and it is a very affordable way of getting cash flow into your business to keep it going until your return for a maximum of 2 years.  Some companies will pay your expenses for up to 2 years and some will only pay for 1 year, so please contact us so we can talk about your business and what solution is right for you. If you knew you could not return to your business and your insurer was paying your expenses, you could take more time to sell your business for what it’s worth, but not for a fire sale price.  It will buy you time to sell and exit if you could return to work. If you want to know what business expenses an insurer will pay for you, and what the premium would be, just give us a call and we can make an assessment for you and work out a premium for you.

Business Insurance