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What is Small Business Insurance and Do You Need it?

Business 101August 15, 2023

Imagine your business as a little boat sailing in a vast ocean. Small business insurance is like a safety net that helps protect your boat from unexpected storms and rough waves. It provides financial support if something goes wrong in your entrepreneurial journey.

Even if you’re a "business of one," having small business insurance may be a smart move. Here's why:

What is Small Business Insurance?

Small business insurance is a type of coverage designed to cover potential risks and challenges your business might face. Just like you have car insurance to protect your vehicle from accidents, small business insurance safeguards your business from unexpected events.

When you’re self-employed, you’re your own boss. This means you’re responsible for everything, including your own quarterly estimated taxes, health insurance and even small business insurance. 

Suppose you’re a freelance writer. Small business insurance would cover legal expenses if you accidentally use copyrighted material without permission and your client gets sued. Or, if you’re a photographer and your camera equipment gets damaged and you can’t work, insurance could help replace it.

Do You Need Small Business Insurance?

The decision to get small business insurance depends on a few factors:

  • Risk Tolerance. How comfortable are you with taking on potential financial losses on your own? Insurance can provide peace of mind knowing that if something goes wrong, you won't face massive costs alone.

  • Type of Work. Some industries have higher risks. Insurance could be crucial if you're in a field where accidents or lawsuits are more likely.

  • Client Requirements. Some clients might require you to have insurance before they work with you. 

  • Legal Requirements. Depending on your location and business type, you might be legally required to have certain insurance, like workers' compensation.

  • Budget. Of course, insurance costs money, so consider your business budget and weigh it against the potential benefits.

Types of Small Business Insurance

If you decide to get insurance, you'll need to choose the right type of policy. Common types include:

1. General Liability Insurance

General liability insurance can protect your business from lawsuits filed by people outside of your company who allege that your business caused bodily injury, property damage, or personal injury. This type of insurance can also cover legal fees and settlements.

Example: Say you're a caterer, and a client slips and falls at an event and thinks it’s your fault. General liability insurance could help cover the medical bills and legal expenses if they decide to sue.

2. Professional Liability Insurance (Errors and Omissions Insurance)

Professional liability insurance, also known as errors and omissions insurance, is crucial for service-based or advice-based businesses. It covers you if a client claims you made a mistake, provided bad advice, or didn't deliver promised services, leading to financial losses. 

Example: Imagine you're a financial consultant, and a client claims your investment advice led to substantial financial losses. Professional liability insurance would cover your legal defense costs and potential settlement.

3. Property Insurance

Commercial property insurance covers damage to your physical assets like equipment, inventory, or office space due to events like fire, theft, or vandalism. Most standard home insurance policies have limits or exclusions for business-related belongings. So even if you work from home, it’s worth exploring.

Example: Suppose you're a florist; a fire damages your flower shop and destroys your inventory and point-of-sale equipment. Property insurance could help you get back on your feet by covering the costs of repairing the shop and replacing the lost flowers.

4. Business Interruption Insurance

If your business can’t operate due to unexpected events (like a fire or natural disaster), business interruption insurance helps cover the income you would have earned during that time.

Example: Suppose you run a small bakery, and a flood damages your kitchen, forcing you to close temporarily. Business interruption insurance could compensate for the income you miss out on while you can't bake and sell your goods.

5. Cyber Liability Insurance

Cyber liability insurance can protect your business from losses due to cyber attacks, data breaches, and other cyber-related incidents. This type of insurance can cover the costs of notifying affected customers, restoring data, and legal fees.

Example: Suppose you're a freelance IT consultant, and hackers breach your client database, exposing sensitive information. Cyber liability insurance could help you manage the expenses of notifying affected clients and dealing with potential legal consequences.

6. Commercial Auto Insurance

If your business owns vehicles, you may want to consider commercial auto insurance. This type of insurance can cover your business's vehicles and drivers in the event of an accident, theft, or damage.

Example: If you run a plumbing business and one of your service vans is involved in a collision while traveling to a client’s house, commercial auto insurance could help cover the repair costs and any liability expenses if the accident caused damage to another vehicle or property.

7. Workers' Compensation Insurance

Workers' compensation insurance is typically needed by businesses that have at least one employee. It covers medical expenses and lost wages if employees get injured or sick on the job. 

Workers' compensation generally isn’t required for 1099 contractors (independent contractors) because they're considered self-employed. However, you could still take out a policy on yourself if you’re concerned about work-related injuries. 

Example: Suppose you hire a full-time office assistant to help manage your growing workload, and they accidentally trip over a loose cable while setting up your workspace, injuring their ankle; workers' compensation would step in to cover their medical bills and any wages they might miss while they recover.

How Much Does Small Business Insurance Cost?

The cost of small business insurance depends on your industry, business size, location, coverage limits, and the level of risk associated with your operations. There isn’t a one-size-fits-all price. The key is to get personalized quotes from reputable insurance providers to find the best coverage at the most competitive price.

This table highlights the average cost of various types of small business insurance. But remember, you could pay more or less depending on your business.

How to Get Small Business Insurance

If you’re wondering, “how do I get insurance for my small business?” here’s how to find the best policy: 

1. Understand Your Business Risks

Before shopping for insurance, you need to understand the risks your business faces. Consider the type of work you do, the equipment you use, and the people you work with. For example, if you run a photography business, you may need liability insurance to protect you if a client gets hurt during a photoshoot. If you have W2 employees, you may need workers' compensation insurance to cover their medical expenses if they are injured on the job.

2. Research Insurance Providers

Once you’ve outlined your business risks, you can start researching insurance providers. Look for reputable insurance companies that specialize in providing coverage to small businesses. You can compare quotes online or work with an insurance broker who can help you find the best options for your needs.

3. Get Customized Quotes

Once you have a list of potential providers, get multiple quotes. This will help you compare prices and coverage options. Be sure to provide each provider with the same information to make an apples-to-apples comparison.

4. Understand Policy Details

When you receive your quotes, review them carefully. Ask questions to ensure you fully understand what the policy covers, and note any exclusions or limitations that apply.

5. Purchase Coverage

Once you've selected the right policy, complete the application process, and pay your premium. Keep your policy documents safe so you can reference them if you need to file a claim. 

Streamline Your Business Finances with Found

Getting small business insurance may be a good idea if you're worried about potential accidents, lawsuits, or unexpected events hurting your business financially. Take the time to explore your options and work with reputable insurance providers to find the right coverage at the best price. 

With small business insurance in place, you can focus on what you do best: growing your business and achieving your entrepreneurial dreams.

Ready to streamline your business finances? Look no further than Found. Our all-in-one banking platform offers the tools you need to easily manage your finances, from seamless payments and invoicing to real-time insights and analytics. Check out Found today to discover how we can help you take your business finances to the next level.

This material has been prepared for informational purposes only. 

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