An expert is calling for business owners to consider reviewing their insurance coverage as key indicators predict turbulent times ahead for many small businesses.
With millions of new businesses entering the market for the first time and many others changing their circumstances due to the shifting economic conditions, SMB insurance expert Pavel Yurkov says it’s important for business owners to ensure they have adequate coverage.
“Small businesses face many risks in their day-to-day activities and business insurance is there just in case things go wrong,” says Mr. Yurkov, who is VP of Technology and Operations at SMB insurance service BizInsure.
“With the economy predicted to be a bumpy ride, it’s critical that small businesses update their coverage if there is a change in circumstances.”
A tale of two economies
It is a tale of two economies with conflicting narratives making it a confusing environment for small businesses to operate in.
On the one hand, the US labor market appears strong with small business applications reaching a high of 10.5 million since the Biden administration took control, according to the Small Business Administration (SBA) – the most in any two-year period in the nation’s history.
Coupled with the fact that inflation is quickly declining, wages are continuing to rise, and there are more job openings than workers, and you may be forgiven for thinking the economy was booming.
Yet there is that pesky recession which everyone seems to be talking about… and for good reason.
The Conference Board’s Leading Economic Index, which consolidates several key economic indicators, declined in December for the tenth month in a row.
Indicators such as weaker manufacturing orders, lower consumer expectations, and a shorter average workweek for employees dragged the closely-watched index down, falling by 4.2% in six months – the steepest decline since the start of the pandemic.
A rise in rates
While these indicators are often bad for business, they don’t usually hit home to the average small business owner in a direct way.
But what will hurt – and has been hurting – businesses like Billy’s corner store or Martha’s bookkeeping venture, is the rise in interest rates. Close to 40% of small businesses take out a business loan to cover expenses and grow their operations.
As explained in this Guardian article, the average prime interest rate nearly doubled from 3.25% in March to 7% in December last year.
Given that prime rates are usually reserved for the largest of companies, the article found small businesses are realistically looking at interest rates at around 10%-11%, whereas only months ago, they were around 7%.
In real terms, for a $1 million loan the interest cost would have increased from $70,000 to $110,000.
That extra $40,000 could’ve paid a worker or repaired some critical equipment. Now, it goes to the bank.
With large firms laying off workers in droves and the Fed expected to further increase interest rates, all signs point to an economy heading towards negative growth.
When to consider reviewing your insurance
The small business landscape changed drastically when the last recession hit the economy in 2008; fewer businesses were started, and many had to scale back their operations and lay off workers.
With so much change again expected in the economy, it may be difficult for small business owners to know if they need to review their insurance.
Mr. Yurkov says that while it depends on the individual business’ situation, there are a few circumstances where an insurance check may be in order.
Firstly, he says, if your revenue is down, or you had to lay off employees or relocate to a smaller office, you may actually end up saving money by reviewing your insurance as you may have less risk to cover.
“Conversely, if you’ve bucked the trend and your business has grown, then it’s important to consider whether you currently have enough coverage to protect you from the potential risks.”
Mr. Yurkov also urges new small business owners to consider what they would do if an insurance claim was made against them.
“Business insurance is there to give you peace of mind and reduce the stress of worrying about paying for claims out-of-pocket – but it’s not a set-and-forget product,” he says.
“If your business circumstances shift and your risk changes then your policy may need to change with it.”
