How to Protect Your Business with Credit Insurance

Managing your company’s cash flow is a tough task when you’re not sure your clients will pay what they owe. Rather than take a chance, consider credit insurance.

“Credit insurance has been around, but up until recently, it was really a very expensive proposition and really not affordable for small businesses,” says Michael Zeldes, a senior vice president of HUB International Northeast, a business insurance broker.

 These policies, also known as business credit insurance, trade insurance, bad debt insurance or accounts receivables insurance, may be a worthwhile investment, especially in this rocky economy.

How Credit Insurance Works
Credit insurance is appropriate for any business that extends credit to its clients.

Zeldes offers this example: Say a company has 50 customers and it sells widgets. Of those 50 customers, the widget-maker feels 20 of those companies are their most important customers because they buy the most merchandise.

The widget-maker can identify which of those companies they’re most concerned about, perhaps because of past late payments or non-payment, or simply because of the amount of extended credit. The underwriter for the credit insurance policy will investigate those specific clients and approve the ones the policy would cover.

One of the biggest benefits: The underwriters will continue to monitor the financial health of those companies over time. You’ll get regular reports from the insurance company about your clients, so if the client encounters financial difficulty, you’ll learn about it quickly.

It could really help you stay in business,” says Michelle Dunn, credit and debt collection expert and author of the Collecting Money book series.

The Cost
During a recession, you might be thinking that insurance costs are a luxury you can’t afford, but there’s no downside to applying.

“It’s sort of a no-brainer,” Zeldes says, because underwriters are very willing to evaluate the risks presented by your clients for free, and no one gets paid unless you buy a policy.

You can also control the cost of the policy by deciding how many clients you’d like to cover, and which insurer to use. Depending on the policy, you can choose how many days late a payment has to be before the policy kicks in. You can also select the percentage of the unpaid invoice the policy would pay.

Other Financial Safety Nets
If you extend credit for your clients but you’re not ready for credit insurance, the only other options is to do your own due diligence. Do what you can to check the credit worthiness of a company before you extend credit, said Dunn, but that can be a challenge.

“You can do your own risk management. Only do business with those you know will pay you,” Dunn says. “In a good economy, you might say that you could sell to anyone, but in a bad economy, who knows if even Wal-Mart is a good bet.”

Small Business Owners Can Win the Health Insurance Game

According to the 2012 U.S. Census, there are 28 million small businesses in the U.S., employing 52.6 million Americans — all of whom need health insurance. While small businesses with fewer than 50 employees are not required to provide health insurance coverage, many see it as an important tool to recruit and retain top talent.

SHOP’s shortcomings have been well documented, starting with the delay of initial enrollment by a year due to technical glitches, which still remain for many state exchanges. The requirement that employers offer a selection of options has also been postponed until at least 2016. Because of this delay, small businesses in 18 of the 32 states with SHOP exchanges are able to offer only one coverage option to employees.

On top of this, employers find the tax credit system — one of the more compelling reasons to use SHOP — difficult to navigate. Given these issues, it’s no surprise that a recent report by the Government Accountability Office acknowledged that SHOP will likely undershoot by a significant margin its 2015 target of two million signups.

It’s clear SHOP is not the solution for many small-business owners or their employees. After years of rate increases on group insurance and premiums that often cost more than rent, this isn’t just a benefits problem — it’s a business problem.

Because SHOP has been postponed, many small-business owners think their only choice is to stay with the current group insurance market. The ACA, however, offers another option that can provide their employees more personalized health coverage and can save employers significant money. More and more small-business owners are offering employees a one-time “raise” to buy their own health coverage in the individual market. A small increase in pay — combined with government subsidies, for those who qualify — can allow employees to pay even less than they would otherwise pay under group insurance.

Related: What the Self-Employed Need to Know About Obamacare

Going outside the traditional group market also provides employees with greater choice of coverage for their unique circumstances and regardless of prior health history, thanks to the ACA. The benefits are clear for small business owners, too: Allowing employees to purchase individual coverage helps moderate business expenses, making them more predictable and manageable.

To provide some context: The average group insurance premium is around $6,000 per year for a single person and $16,000 per year for a family. On the individual market, the average premium is $984 per year ($82 per month) after subsidies. It’s undeniable that individual health insurance often costs less than group coverage.

With individual subsidies widely available for families of four with annual household incomes of up to approximately $95,000 and the freedom for each employee to choose from thousands of plans to get the exact coverage they need, the appeal of transitioning to the individual market as a small-business owner is clear. WellPoint, a large health insurance carrier, reported insuring 300,000 fewer people in small-group health insurance plans in 2014. Instead, people opted for — you guessed it — individual plans.

Employer-based coverage will continue to be the largest source of health insurance for Americans, and the government correctly recognizes that small businesses can be a key provider of employee coverage if given the right tools. That being said, the SHOP program fails to meet the needs of many small-business owners, who will continue to explore their options on the individual market.

As a country we’re already investing in the ACA, which appears to be working on the individual level. Instead of investing in a program with little utility — SHOP — consider doubling down on the individual market. Small business owners should be aware of how it can help them secure the health of their employees and the financial prospects of their business

Some Type of Insurance You Need for Your New Business

One of the most common mistakes startup business owners make is failing to buy adequate insurance for their businesses. It’s an easy error to make: Money is tight, and with so many things on your mind, protecting yourself against the possibility of some faraway disaster just doesn’t seem that important, but it doesn’t take much to destroy everything you’ve worked so hard to build. Following is a closer look at the types of business insurance most entrepreneurs need.

The basic business insurance package consists of four fundamental coverages—workers’ compensation, general liability, auto and property/casualty—plus an added layer of protection over those, often called an umbrella policy. In addition to these basic needs, you should also consider purchasing business interruption coverage and life and disability insurance.

 Workers’ compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Workers’ comp insurance consists of two components, with a third optional element. The first part covers medical bills and lost wages for the injured employee; the second encompasses the employer’s liability, which covers the business owner if the spouse or children of a worker who’s permanently disabled or killed decides to sue. The optional element of workers’ compensation insurance is employment practices liability, which insures against lawsuits arising from claims of sexual harassment, discrimination, and the like.

Generally, rates for workers’ comp insurance are set by the state, and you purchase insurance from a private insurer. The minimum amount you need is also governed by state law. When you buy workers’ comp, be sure to choose a company licensed to write insurance in your state and approved by the insurance department or commissioner.

Comprehensive general liability coverage insures a business against accidents and injury that might happen on its premises as well as exposures related to its products. For example, if a visiting salesperson slips on a banana peel while taking a tour of your office and breaks her ankle,.general liability covers her claim against you. Or let’s say your company is a window-sash manufacturer, with thousands of window sashes installed in people’s homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results.

There’s one difficulty with general liability insurance: It tends to have a lot of exclusions. Make sure you understand exactly what your policy covers … and what it doesn’t. You may want to purchase additional liability policies to cover specific concerns. For example, many consultants purchase “errors and omissions liability,” which protects them in case they are sued for damages resulting from a mistake in their work.

If your business provides employees with company cars, or if you have a delivery van, you need to think about auto insurance. The good news here is that auto insurance offers more of an opportunity to save money than most other types of business insurance. The primary strategy is to increase your deductible; then your premiums will decrease accordingly but make sure you can afford to pay the deductibles should an accident happen.

Pay attention to policy limits when purchasing auto coverage. Many states set minimum liability coverages, which may be well below what you need. If you don’t have enough coverage, the courts can take everything you have, then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy. You should carry at least $1 million in liability coverage.

Most property insurance is written on an all-risks basis, as opposed to a named-peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn’t covered.

Make sure you get all-risks coverage, then carefully review the policy’s exclusions. All policies cover loss by fire, but what about hailstorms or explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks.

Whenever possible, you should buy replacement cost insurance, which will pay you enough to replace your property at today’s prices, regardless of the cost when you bought the items. For example, if you have a 30,000-square-foot building that costs $50 per square foot to replace, the total tab will be $1.5 million. But if your policy has a maximum replacement of $1 million, you’re going to come up short. To protect yourself, experts recommend buying replacement insurance with inflation guard. This adjusts the cap on the policy to allow for inflation.

In addition to these four basic “food groups,” many insurance agents recommend an additional layer of protection, called an umbrella policy. This protects you for payments in excess of your existing coverage or for liabilities not covered by any of your other insurance policies.

Additional Coverage

When a hurricane or earthquake puts your business out of commission for days—or months—your property insurance has it covered. But while property insurance pays for the cost of repairs or rebuilding, who pays for all the income you’re losing while your business is unable to function?

For that, you’ll need business interruption coverage. Many entrepreneurs neglect to consider this type of coverage, which can provide enough to meet your overhead and other expenses during the time your business is out of commission.

Many banks require a life insurance policy on the business owner before lending any money. Such policies typically take the form of term life insurance, purchased yearly, which covers the cost of the loan in the event of the borrower’s death; the bank is the beneficiary. The life insurance policy should also provide for the families of the owners and key management. If the owner dies, creditors are likely to take everything, and the owner’s family will be left without the income or assets of the business to rely on.

Another type of life insurance that can be beneficial for a small business is “key person” insurance. The company is the beneficiary of the key person policy. When the key person dies, creating the obligation to pay, say, $100,000 for his or her stock, the cash with which to make that purchase is created at the same time. If you don’t have the cash to buy the stock back from the surviving family, you could find yourself with new “business partners” you never bargained for—and wind up losing control of your business.

It’s every businessperson’s worst nightmare—a serious accident or a long-term illness that can lay you up for months, or even longer. Disability insurance, sometimes called “income insurance,” can guarantee a fixed amount of income—usually 60 percent of your average earned income—while you’re receiving treatment or are recuperating and unable to work. Because you are your business’s most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.

Another optional add-on is “business overhead” insurance, which pays for ongoing business expenses, such as office rental, loan payments, and employee salaries, if the business owner is disabled and unable to generate income