Basic Rules for Protecting a Business

Basic Rules for

Protecting a Business

Don’t know where to start?
Here are some basic guidelines to follow when looking to protect your small business.


Always Protect the Costs-to-Stay-Open-for-Business first

The costs to stay open for business are the 'fixed overhead costs' and are often contractual in nature. Make sure you have 12 months of fixed-cost funding on hand, just in case, so you can have a business to come back to after you recover from an unexpected sickness or accident, or so you can have an active business to sell as an ongoing concern if you have not yet recovered after 12 months. Insuring the Fixed Overhead Costs reduces the risk to a small business.


Always Protect the Key Revenue Maker

The biggest risk to a small business is usually its overreliance on its Owner. Whether the Business Owner, a Specialist Expert or a Key Person, most businesses derive the bulk of their revenue from a few key individuals.

Insuring the Key Person to the business protects a business from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner, or skilled employee through sickness, injury or even death.


Always Protect the Business Debts

Businesses use debt to start-up or to grow. Whether these funds are supplied by the owner (Directors Loan Account) an external funder (using 1st mortgage security over property assets) or investors (usually a combination of mortgages and Director Personal Guarantees), nothing stops a business like an unexpected and immediate call-up of debts, well before they're expected to be repaid. Nothing stresses a business and its suppliers as having difficulty meeting its loan and debt obligations. Insuring the Business Debts & Liabilities from sickness, accident, or even death of the Owner, Business Partner or Key Person reduces the risk to a small business.


Always Protect the Business Ownership

Owning a business in Partnership with another means all the Partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership, due to one or more of the partners unexpectedly suffering a motor vehicle accident, ill health, or even death and then selling their shares, could destabilise the business ownership and risk its future. Protecting business ownership with a Partnership Agreement, Company Powers of Attorney and Insuring the Business Ownership, help reduce the risk to a small business.


Find a Risk Adviser specialising in working with Small Business Owners and their Families

Protecting yourself and your family from the risk of running a business is key to business and family harmony (and peace of mind). This is because small businesses and the families that support them have different risks, liabilities, and time constraints than average employee-based families. The team at Sapience Financial specialise in working with small business owners and their families, Sole Traders, Partnerships and Multi-owner business, and their Companies to help them protect themselves from their business.

Fixed Business Expenses Insurance OR Key Person Replacement Insurance explained

business man standing in factory warehouse with two coworkers inspecting pallet racking

Protecting Fixed Business Expenses

All business owners know, it costs money to make money – and it requires a continual flow of money just to keep the doors open for business. But many business owners don’t know they can insure the cost of their fixed overhead expenses, just in case they become sick or injured and unable to work.

  • It's these fixed ongoing costs of the business overheads (usually contractual in nature), that can be the downfall of a business whose owner suddenly finds themselves sick or injured and unable to work.

What it does

The general idea behind fixed business expenses insurance is to reimburse a business for the fixed expenses it would continue to accrue if the business principal (or Key Person) was unable to work because of a sickness or injury.

  • In practical terms, it's designed to support short periods of disability (usually to a maximum of 12 – 24 months) so there's still a viable business for the business owner to go back to after they recover from a prolonged sickness or injury.

Protecting yourself from these fixed overhead costs means you'll still have a business to go back to when you recover. This can be a better solution than trying to pay your fixed recurring business costs from your own Income Protection benefit capped at 70% of your personal earnings if you've become sick or injured and unable to work.

Pro Tip: This protection strategy is particularly important for Business Partnerships where responsibility for costs can be shared equally and therefore the sickness or disability of one partner, would then increase the cost responsibilities to the remaining partners, all at a time when cash flow would already be under stress.

How does this help you?

This protection strategy is especially important for Sole Traders – where all business debts are your personal responsibility, and Partnerships – where responsibility for costs are joint and several across all partners, and where the sickness or disability of one partner would increase the cost responsibilities to the remaining partners — all at a time when cashflow would already be under stress.

Common Fixed Business costs can include:

Accounting and auditing fees (regular only)
Bank fees and charges
Cleaning costs (regular only)
Electricity, gas, and water utilities
Fees for professional associations
Insurance premiums (excluding this policy and Income Protection policies)
Interest payments on business loans
Leasing/Hire purchase of office equipment, machinery or motor vehicles
Loan repayments of business capital/principal loan (minimum ongoing only)
Locum cover (less any earnings generated by a Locum)
Motor vehicle fixed business-related costs (registration etc.)
Payroll tax for employees not directly involved in revenue generation
Printing postage and stationery
Property rates/taxes/strata fees
Rent/Leasing fees (business premises)
Repairs and maintenance
Salaries of employees not directly involved in revenue generation (excluding income splitting)
Security costs
Subscriptions/fees for business-related associated memberships
Superannuation contribution for employees not directly involved in revenue generation (excluding income splitting)
Telephone & IT Systems

Download our Fixed Business Expenses Checklist worksheet, to help get you started

Fixed Business Expenses at a glance

Fixed Business Expenses insurance provides a short-term solution, subject to the following:

  • Insurance cover is to be owned by the business
  • The Life Insured must be a business owner
  • The cover is limited to 12 times the allowable fixed business expenses costs
  • Fixed Business Expenses cover is not usually available with Keyperson Replacement cover 

Frequently Asked Questions about Fixed Business Expenses Insurance

What happens if a business owner with Fixed Business insurance in place is disabled and unable to work for longer than 12 months?

Our experience has been if a business owner suffers a disability that sees them unable to work for an extended period of time, having the recurring fixed costs of the business taken care of, allows the owner to concentrate on recovery.
For a worst-case scenario, it provides breathing space to make arrangements to exit the business without the need to be forced into a fire sale position.

Is Fixed Business Expenses insurance suitable for Business Partnerships where there are two or more working owners or directors?

In the case of a 50-50 partnership where the fixed costs are apportioned equally between the two partners, each partner can insure 100% of their portion of those costs. If a business owner has prepaid eligible fixed costs before being sick or injured and unable to work, a pro-rata reimbursement for those amounts is usually available too.

How long can a claim for Fixed Business Expenses insurance last?

Business expenses insurance cover is usually capped at paying for a maximum of 12 (and in some circumstances up to 24 months), while the insured person is unable to work due to sickness or injury.

How do I calculate business use costs for Fixed Business Expenses insurance if I work from home?

Many people in a self-employed situation, choose to structure their tax position in a way where they might claim some expenses under their business structure for which they also may receive some degree of personal use. Even though these expenses appear in the accounts of the business, they may be enhancing the lifestyle of the business owner to a percentage, and as such the calculations can be adjusted accordingly. For example;

  • A vehicle may be used 90% for business purposes and 10% for family use etc.
  • You might share the business's internet broadband services with your partner.

Ask your Accountant for a list of your business expenses with the percentage breakdown of the eligible fixed cover costs for your business and compare them with our suggestions in our downloadable worksheet. Depending upon your type of occupation, working from home can be difficult for a risk insurance company to manage in the event of a claim, so be sure to check for any possible restrictions that may be relevant to your personal situation.

How we can help

Fixed Business Expenses insurance strategies are an important part of protecting your business and your family, from the business.

Contact us for a confidential chat about your needs.

Related: Types of Business Insurance products we work with

There are lots of different types of risk protection insurance that can help in different situations.

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