How Can Insurance Improve Cash Flow Problems For Small Businesses?

One of the biggest challenges for micro-business owners is managing their cash flow. Your work can be feast or famine. Jobs may be piling up one week and fall off a cliff the next.

Because your work and income can fluctuate so much, unforeseen expenses pose a major threat to your business. In a piece called "How to Prevent a Cash Flow Crisis," the business data website Dun and Bradstreet estimates that 90 percent of small businesses fail because of a mismanagement of their income and expenses. Theoretically, small businesses should build up a "cash cushion" to help them pay for unexpected costs and make it through a month or two of low sales.

That's a great strategy, and while it offers some protection for the normal ups and downs of a business, most small businesses don't have adequate savings to cover lawsuits or property damage.

If a client refuses to make a payment and claims that your work was unsatisfactory, you might have enough savings to survive a few months without income, but you won't have enough to settle an expensive Errors and Omissions lawsuit.

Paying for lawyers and other aspects of your legal expenses can drain your bank account in a hurry and fill the time you would normally be able to spend focusing on your business.

Having proper business insurance is one way of managing your cash flow. By covering all costs associated with a liability lawsuit (including court fees, lawyer's fees, and settlements or judgments), business insurance can make those peaks and valleys less severe.

Next: What Do the New ACA (Affordable Care Act) Laws Mean for Sole Proprietors and Small Businesses?

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