As a small business owner, you work day and night to make things go right. Who has time to think about what could go wrong? Understanding your vulnerabilities and the unique factors about your business that could affect your business’s risk profile is an essential part of building a thriving company.
Although risks are inherent in every business, you can manage them through careful assessment and planning. And we’re here to help you plan your small business risk assessment. So let’s start with a high-level overview of some of the top business risks to increase your awareness. Facing risk can be scary, but you’re not alone!
If you own a business, you’ve got risk. But what is it? Business risk is exposure to events or circumstances that could result in financial loss. So anything that threatens the viability of your business is considered a business risk.
If you’re just starting or your business is growing, conducting a comprehensive small business risk assessment is important. The first step is to get a bird’s-eye view of the business risk categories that may impact you. So let’s jump right in.
While business risks can include any threat to your business, insurance risks refer to potential hazards that insurance may cover. And by understanding these risks, you can better prepare for the unexpected. So let’s dive in and review some of the top business insurance risks:
A recent survey of risk management experts ranks cyberattacks as the number-one business risk for 2023. But only 5% of small business owners report it as their top concern, and less than 20% have cyber insurance.
If you think your business is too small to be the victim of a data breach, think again. Unfortunately, cybercrime against small businesses is on the rise. In 2020, over 700,000 small businesses in the U.S. experienced a cyberattack, totaling $2.8 billion in damages. By 2021, over 60% fell victim to cyberattacks, including malware, phishing, data breaches, website hacking, Distributed Denial-of-Service (DDoS) attacks, and ransomware.
And as a result of weaker security systems/protocols, cybercriminals are increasingly targeting small- to mid-size companies. In 2021, 37% of all ransomware attacks were against companies with fewer than 100 employees.
Not only are cyberattacks expensive, but they also can cause lasting reputational harm. For example, a SurveyMonkey survey found that most Americans are less likely to do business with a company after it suffers a cyberattack.
2. Property damage
Running a small business is hard. Dealing with the impact of a hurricane, flood, or fire can be catastrophic.
A recent federal report details how extreme weather has cost the U.S. more than a trillion dollars in the last 7 years. And climate change may increase the risks associated with property damage and business interruption in the coming years.
According to a study, 40% of small businesses will experience a property claim in the next decade. And the damage is costly:
3. Human risk
Mother Nature is infamously moody, but humans can be just as unpredictable. Alcohol and drug abuse, illness, and workplace injury can be major internal human risks for employers. Whether your workers operate heavy equipment or sit in front of a computer all day, your business may be at risk.
Small businesses are vulnerable to external human risk as well. For example, your business can be held liable if a customer is injured on your property. And a recent survey found that theft is on the rise. For some small business owners, the daily shoplifting rate nearly doubled.
4. Professional service mistakes
Mistakes happen — a lot! One market research poll found that the typical employee makes more than 100 on-the-job mistakes every year. And service providers can face legal action if their service doesn’t meet a client’s expectations. But here’s the really scary part — even if you may not have made a mistake, you can still face an allegation. And one lawsuit, even if unwarranted, can cripple your small business.
5. Building projects
If business is booming, you may consider a construction project to accommodate your growing team. Construction can create new workplace risks. Objects blocking walkways and wet surfaces can lead to slips and falls. And as a business owner, reviewing your insurance coverage before embarking on expansion projects is critical.
For more details on common insurance risks, check out this article.
Managing business risks involves identifying, assessing, and mitigating potential hazards. Although some risk is inevitable, the following steps can minimize the potential impact:
No two businesses are alike, so it’s critical to map out your unique risk profile. This would include identifying risks and assessing their impact should they occur. As a first step, consider hiring a risk management firm to conduct a company-wide review of your vulnerabilities. Or assign employees with expertise in business risk management.
This is particularly important for larger businesses, but having a business risk expert can benefit small businesses as well.
Once you have identified your business risks and determined their impact, rank them in terms of their probability:
By prioritizing threats, you can start to build your risk mitigation plan. Of course, you should first address hazards that are likely to occur. However, you also may want to prioritize less likely risks if the potential for financial damage is significant. For example, petty theft is extremely common — almost 90% of small businesses experienced shoplifting in 2021. But the average cost per claim for reputational harm is $50,000.
The best way to avoid mishaps is by taking steps to prevent them from happening in the first place. For example, routine safety checks and maintenance can be effective ways to reduce the potential for a health and safety risk event. In addition, your risk manager should conduct regular inspections and develop a plan of action for emergencies.
Employees should receive some form of risk-prevention training. Eighty percent of all hacking incidents involve compromised passwords, and cybersecurity training for your employees will be especially important in the coming years. Antivirus software, firewalls, VPNs, and password management are the top-four cybersecurity tools small businesses may adopt.
Many small businesses are set up as sole proprietorships. But did you know you can limit your liability by changing your business structure to a limited liability company (LLC)? As the owner of an LLC, you won’t be held personally responsible for the repayment of your company's debts or liabilities. So, for example, if your business goes belly up due to an unforeseen risk, your personal assets would likely not be pursued.
To learn more about the pros and cons of an LLC, check out this article.
Buying insurance allows you to transfer some of your financial risk to an insurance company, making it one of your best defenses should a risk event occur. And as a small business owner, you may need a combination of insurance policies to cover your needs.
Let’s review the most common policies for small businesses:
General liability insurance: General liability insurance (GL) typically covers costs related to third-party accidents including property damage, bodily injury, and medical expenses.
For more on how GL coverage can help reduce business risks, check out this article.
Workers’ compensation insurance: If you have employees, you’ll have some increased risk. And there’s a good chance you’ll need workers’ compensation insurance (WC). WC typically covers medical bills, lost wages, and legal costs associated with an employee who gets sick or hurt on the job.
We have more information on how workers’ comp can help protect your growing business here.
Professional liability: If you’re in the business of providing advice or other services, you may want to consider professional liability insurance (PL). Everyone makes mistakes! And PL typically covers actual or alleged negligence.
You can learn more about professional liability here.
Inland marine insurance: Inland marine coverage will typically help protect the tools and equipment you use on the go or at a job site. This coverage typically includes damage or theft of business property in transit or stored at an offsite location.
Cyber liability insurance: Cyber insurance covers the costs of claims associated with stolen customer data, cyber breaches, and fraud. Cyber insurance also may cover crisis management and reputational harm expenses related to a cyberattack.
You can learn more about cyber ithreats here.
Business owner’s policy: A BOP simplifies coverage by combining the following insurance products into one package:
In addition to third-party claims against your business, BOP helps cover costs associated with damage as a result of fire, theft, or weather events, including business interruption. BOP also can help cover costs related to reputational harm and product liability.
There’s a lot to consider! If you’re looking for more information on how to mitigate business risks, check out these helpful guides:
Small business insurance is what we do — offering the insurance coverages small business owners may need. And we customize them based on what you do. That's how we've helped insure thousands of businesses across the U.S.
With Simply Business®, you can shop, compare, and buy business insurance policies from some of the nation’s most trusted insurers — all in just mere minutes. Tell us a little bit about your business. We do the legwork. Use our free quote tool to get started with policy options from the nation’s top insurers. If you see a policy option you like, you can click to buy it. It really is that simple!
Got questions? We can help there, too. Our licensed insurance pros can get you the answers you’re looking for and get you covered — often on the same-day call. You can reach them at 844-654-7272, Monday-Friday, 8 a.m.-8 p.m. (ET).
Born and raised in the fishing port of Gloucester, MA, I grew up listening to the sea stories of local fishermen. My first job was “chum girl” on my dad’s tuna boat, where I spent my formative years covered in fish guts. Since then, I’ve worked as a researcher, blogger, and writer for documentary films. When not at work, you can find me surfing the cold waters of the North Atlantic or searching for warmer waves around the world.
Courtney writes on a number of topics such as risk assessment, starting a small business, and financial resources.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.