Coverage for starting a new business
How do you determine the coverage you need? e.g. a million, 500K?
Hi Dr. Hendricks,
Do a cash flow forecast (projections) to include startup costs for your new venture.
I like to start with the end goal in mind i.e. how much revenue do I think is feasible in years 1, 2, 3, and then from there work it out month by month from beginning to end, how exactly am I going to generate that gross revenue.
I also project all fixed and variable expenses I anticipate, including start-up costs. Not knowing what your startup is, I can’t say specifically what all your expenses are going to be, but some are pretty standard i.e. legal, accouning, taxes, wages (if hiring), insurance, office space, marketing budget, utilities, equipment and supplies, etc.
If you’re looking to borrow, a bank or investor will want to see a business plan that shows solid financial projections, including how they get their money back out and profit. If you’re self funding, a forecast will be a great roadmap to keep you on track. Run your actual numbers alongside it month by month. You’ll learn a ton!
Insurance coverage boils down to two factors: your actual loss risk and your desired level of comfort.
The actual loss risk: what would happen if your business space was completely lost (i.e. a fire)? How much equipment, furniture, signage, inventory, computers, etc… do you have? Determine the value to replace them and that is the starting point for actual loss risk. Of course, there is also the cost to repair or replace the building. Insurance companies look at the construction costs to rebuild physical structures based on size, materials, location.
Your landlord may also determine a minimal general liability policy and commercial property policy. Most landlords require a minimum of $1 million in general liability.
Then there is your comfort level: A general liability policy can start as low as $100,000. Think about the likely exposure. Do keep in mind that double liability coverage rarely results in double premium costs. Yet, one claim can bankrupt a company not prepared.
For more information on general liability insurance: https://fitsmallbusiness.com/commercial-general-liability-insurance-cgl/
Generally, anything under a million in liability coverage is risky. Some people aren’t comfortable having anything less than $5 million to protect business assets. That being said, comfort level isn’t something we can decide for you. It has to be something you feel good about.