Myth: When a business closes its doors as a result of business interruption, it is a mere hiccup for profits and customers.
Fact: Without business interruption insurance, short-term shutdowns can easily lead to permanent closures.
If small business owners learned anything from the recent unpredictable economy, it is that the fate of their businesses can turn on a dime. That lesson has made an impression, leading some small business owners to take a more aggressive approach to managing risk — but not all owners know exactly what those aggressive measures should be.
A Travelers survey found that while 94 percent of small business owners are somewhat or extremely confident their businesses are protected from insurable risks, only 39 percent say they are able to make the time necessary to effectively identify and manage operational risks. Managing risk should be a top priority for every small business owner — particularly when it comes to planning for the unthinkable — business interruption.
All too often, small business owners are unaware of the impact an interruption can have on their businesses and many assume that any incident will be a mere inconvenience. No business owner wants to believe a few hours of “closing shop” could turn into days, weeks or even months and potentially bankrupt the business. The truth is, a fire, pipe burst or vandalism could do just that.
In fact, the American Red Cross found that as many as 40 percent of businesses never reopen after a disaster.
Customer loyalty
Small businesses have the advantage of strong community ties and a loyal customer base. These relationships help keep Main Street businesses alive, but assuming customers will hurry back after a business has to close its doors is dangerous. Whether it’s an auto-repair shop, grocery store or law firm, small businesses offer necessary goods and services that consumers simply cannot disregard or postpone. They are forced to seek other options and, depending on the length of interruption, customers may well develop ties to the “alternate” option.
When operations are up and running again, small businesses face the additional challenge of raising local awareness and incentivizing customers to break their new habits in favor of the previous relationship.
Without business interruption insurance, small businesses are forced to make up lost profits while juggling a reopening, recruiting customers and making bill payments associated with damages and rebuilding, which is no small task.
Because customers have strayed to competitors out of necessity, many small businesses are forced to recruit old and new customers alike. Traffic typically requires small business owners to increase marketing costs and offer client discounts.
In today’s economy, profitability is a challenge even for companies that escape interruption. Small business owners need to protect their investments by securing insurance coverage that replaces lost profits, which alleviates the stress of tapping extra resources for funding. Owners even have the option of purchasing extended income coverage as well, which goes even further to aid a business if an emergency occurs.
Short-term solution
With the right type of insurance coverage, closing doors does not have to mean temporarily shutting down the business. Extra Expense coverage typically provides business owners with a cushion to keep the company active.
For example, if “Main Street Grocery” experiences an electrical shortage and a resulting fire in part of the store, the owner may be able to move to an open location nearby. Extra Expense can help cover the difference in rent, paychecks for additional employees or the expense of moving from one location to the next. Opening an alternate location gives small businesses the ability to continue serving customers and maintain profit momentum.
Business interruption insurance is one of the most valuable tools in a small business owner’s risk management arsenal. It can replace profits that would otherwise be lost when business is interrupted and provide extra cash to help small business owners keep operations moving forward. Lack of awareness and preparedness, coupled with unfounded assumptions, can spell disaster for small businesses. Securing the right coverage can protect small business owners from unforeseen disasters and permanently closing their doors.
Greg Even is regional vice president, Northeast, for the small business division of Travelers. For more information go to www.travelers.com/smallbusiness.
