Take Control of Your Small Business

It’s an idea more and more Americans are acting on: Turn time at home into extra cash by running a small business out of the house. Perhaps it’s selling handmade accessories online or giving guitar lessons to kids.

Or maybe you’re ready to launch a cosmetics business, as one Texas Farm Bureau member did.

As she planned the new venture, she smartly asked her Texas Farm Bureau Insurance Agent, Gerardo Galvan: Would she be compensated for her merchandise if something happened to it?

She wanted to run the business out of her home as a way to make some secondary income (she also taught full-time). At the time, all she had for coverage was a regular homeowners insurance plan. Galvan knew she needed more.

The entrepreneur age

Home-based enterprises now comprise the most common form of small business in the U.S., with a new one launching every 12 seconds. Today, an estimated 15 million home-based businesses are bringing in dollars around the United States.

The growth is due to the ease with which a business can get started, the low costs of producing an online presence, and the increase in communication tools to spread the word about the company. But that’s leaving millions of people at risk, since they’re using homeowners insurance to protect themselves if something happens to the business. “When making a significant portion of annual income on a secondary job … you want to protect your inventory,” says Galvan.

“Most businesses should really have a commercial policy,” he continues. “Inventory is not covered under homeowners.”

The number of people facing this issue is higher than ever, with one in 10 homes running such a business. The Independent Insurance Agents & Brokers of America ran numbers a few years ago that showed 60 percent of home-based businesses lack commercial insurance. When asked why the companies don’t have a commercial policy, 40 percent said they thought they were covered through other insurance vehicles. “There are a lot of home-based businesses that should carry insurance and don’t,” adds Galvan.

But the kind of insurance you should carry depends on what type of company you run. This will dictate what you should look for in commercial coverage, in order to protect your business and your lifestyle.

More inventory, more problems

The client who approached Galvan with the business idea stored $10,000 to $15,000 worth of merchandise at her home. Her main concern was what might happen if a fire broke out in the house or if someone robbed her. Galvan’s honest answer was that her merchandise would probably all be lost.

“Nine times out of 10, the personal property coverage of the homeowner doesn’t cover that expense,” says Galvan.

For companies that store merchandise at the home but conduct business outside of it, property or inventory coverage becomes a concern. How much you insure will depend on your comfort level with risk.

“It’s a personal preference” of the insured, adds Galvan. “I would personally want 100 percent of the inventory covered, but I know stuff happens.”

Also be careful determining when your merchandise is covered and when it’s not. With a commercial policy, while your materials may be covered at your place of business, they might not be covered in transit. That means you must check your auto insurance policy to see if there’s coverage for the products when you’re transporting them from one location to the next.

Liabilities of service

Of course, in the age of services, not all businesses actually own much merchandise. That doesn’t mean that these service providers shouldn’t also look for commercial coverage. Personal trainers, photographers, babysitters, and hairstylists all have found a niche by offering their services from their home. This can keep start-up costs low since they don’t have to pay for a studio or invest in a salon.

But that also means customers will be coming in and out of the house, and homeowners insurance often doesn’t cover liability claims related to your company. So if someone trips on a step and breaks their leg while coming into the home for business purposes, you’re probably not protected from the accident.

“Take trainers, for example. They have no inventory, no product they are actually selling,” says Galvan. “To be covered correctly, they need a commercial general liability policy.”

The need for such coverage doesn’t depend on the amount of annual income you earn from the business, either. It’s protection against the running of the business. As soon as customers start entering the home, the potential for a liability issue to arise becomes real.

Peace of mind

Galvan suggests reviewing your commercial policy every six months to a year to figure out which areas of your business are covered and which aren’t. And for farmers and ranchers, there’s a specific homeowners policy that’s geared to the needs of a farm.

Galvan’s cosmetics entrepreneur decided to get both liability and inventory coverage, in case someone tripped while picking up products at her house.

“Her case was peace of mind,” adds Galvan. “If somebody came to see her and came to buy, or if product was stolen, she knew she had some sort of coverage in place.”