Your small business exists because you took a chance on your passion. It’s everything to you. So, why let risk run amok? Here’s how to lasso in the threats that can derail what you’ve built.
The basic steps for small business risk management are:
- Identify your risks
- Prioritize and weigh the risks
- Reduce or transfer the risk
- Monitor as you grow
Risk: Anything that can potentially hurt your business, from finances to reputation
1. Identify the Risks That Actually Apply to You
Risk management for small businesses looks different for each entrepreneur. But the first step is asking yourself one question: What can go wrong?
Run a risk audit to find the risks that are relevant to your business. While not the most fun task, we admit, it is essential for protecting your business — you can’t manage what you haven’t named.
Put on your pessimist glasses and look at all aspects of your business.
Risk Audit 101 - “What’s the Worst That Can Happen?”
Some examples of risks to watch out for include:
Physical Risk
- Slip-and-fall accidents at your location
- Tools and supplies stolen or damaged
- Property damage from fire, flood, or theft
Financial Risk
- Cash flow problems
- Unplanned expenses
- Clients not paying invoices
Reputation Risk
- Client publicly claims you failed to deliver services
- Competitor says you stole their logo or slogan
- Backlash on your social media posts
Digital Risk
- Hacked website or online store
- Loss of customer data
- POS or booking platform downtime
Legal Risk
- Client injury or property damage claims
- Operating without the right licensing or insurance
- Unintentionally violating employment laws
Employee Risk
- Employee steals from your business
- Employee gets hurt while working
- Employee claims you discriminated against them
Who Could Be Harmed?
- Your customers or clients
- Your employees or contractors
- You, as the business owner (via finances or time and energy spent dealing with an issue)
These are just a few of the risks your business might be exposed to. Start at the high level of your operations, then dive deeper into specifics to ensure you identify everything.
Unique Businesses, Unique Risks
Hallie, Mobile Dog Groomer
Potential Risks
- Physical: Dog escaping in transit
- Financial: Last-minute cancellations
- Digital: Booking app crashing
- Legal: Dog injury claim
- Reputation: Client posts a video claiming Hallie mishandled their pet
Cade, Food Truck Owner
Potential Risks
- Physical: Customer becomes ill from food
- Financial: Lost revenue from cancelled event
- Digital: Customer info stolen from point of sale (POS)/loyalty system
- Legal: Customer claim of allergic reaction to food
- Reputation: Customer leaves negative review about Cade’s food safety practices
A significant risk focus for a mobile dog groomer is professional liability, which includes the potential for a client to claim a pet got hurt during a routine haircut. On the other hand, a food truck owner might be more concerned with product liability, for example, if their food made a customer sick.
40% of small businesses experience an insurance claim annually. That’s a lot of lost money and time that could have otherwise been spent growing a startup! You can’t protect your small business from risks without first knowing what you’re up against.
Your Next Step: Complete a risk audit. You can break this up into smaller tasks (like listing all physical risks today, legal risks tomorrow, etc.) to make it more manageable, but start now!
2. Prioritize and Weigh the Risks
Now that you’ve identified the dangers lurking around your business, the next step is to prioritize and weigh each one. Use a simple framework to sort risks by:
- Likelihood (low, medium, or high chance of happening)
- Impact (low, medium, or high impact on your business)
Small Business Risk Management: Sample Assessment for a Yoga Instructor
| Risk | Type | Likelihood | Impact | Note | Action |
|---|---|---|---|---|---|
|
Student injury |
Physical, legal, financial |
Medium |
High |
Especially in challenging classes |
Offer modifications, carry liability insurance |
|
Trip hazard from props |
Physical, legal, financial |
Medium |
High |
Can lead to minor claim |
Regular safety checks during class, carry liability insurance |
|
Liability waiver not updated |
Legal, financial |
Low |
High |
Small oversight could result in big legal issues |
Update liability waiver and ensure all students sign |
|
Tech failure during virtual class |
Physical, financial |
Medium |
Low |
Common but manageable tech issue |
Have backup connection options, offer a makeup class to students |
For example, a yoga teacher might assess their practice and conclude that the risk of student injury has a medium likelihood with high impact, especially during a hot yoga or advanced class.
Another example: a gigging musician might note that the chance of rain at outdoor weddings ruining their gear is low during the dry season, but high impact — super expensive and disruptive!
3. Take Action to Reduce or Transfer the Risk
So, your small business risks are carefully assessed. What’s next? There are four ways you can approach them.
Steps for Managing Business Risks
- Accept: The risk is minimal, so you accept the possibility (and implications)
- Avoid: You eliminate it (for example, you stop offering an especially risky service)
- Reduce: You lower the risk by taking preventive measures
- Transfer: You transfer the risk to another party
Accept or Avoid the Risk
Not every risk is worth addressing, particularly if the likelihood and impact are low. For example, a cleaning professional just starting out might accept the risk of losing small supplies like towels or gloves — replacing them would be cheaper than paying to insure them.
And sometimes, it’s smarter to avoid the risk altogether, like a pet groomer declining aggressive dogs without behavioral vetting or a baker choosing not to use peanuts in their cookies.
However, it’s not always feasible to omit a product, service, or business operation, which is why the next two options are the most important.
Reduce the Risk
Reducing the risk means changing how you do business to make the risk less likely or severe.
Examples of Risk Reduction
- Cleaning Professional
- Waiver of damage liability
- Safety checklist for chemicals
- Crafter or Artist
- Product disclaimers in descriptions
- Clear shipping and return policy
- Cosmetologist
- Sanitization checklist before each appointment
- Safety training on new products and techniques
Implement policies or processes that help make running your business safer — whether by education, having a backup plan, or clear communication with customers.
Transfer the Risk
Our favorite risk management approach here at Insurance Canopy is the transfer of risk, meaning you pass off the risk to someone else, typically through a contract or small business insurance.
Contracts: You can use a contract to shift responsibility for certain risks to another (called indemnification). These agreements often include terms like who’s liable, insurance requirements, and “hold harmless” (one party will not be held responsible) language.
Small Business Insurance: Instead of covering losses on your own, your insurance company steps in to help! Many common risks, like injuries, property damage, or professional mistakes, can be covered by the right policy.
| Your Risk | The Insurance You Need | How It Helps |
|---|---|---|
|
You sell at a weekend market and are worried about customers getting injured at your booth |
Covers third-party liability claims, like customer injuries or property damage |
|
|
You offer professional services, such as wedding photography or personal training sessions |
Covers claims related to your professional services, such as mistakes, harmful recommendations, or failure to deliver |
|
|
You accept payments online and are at risk of cyberattacks, such as theft of customer data |
Covers damages associated with cybersecurity claims, such as data breaches or phishing |
|
|
You sell, serve, or distribute alcohol |
Covers claims caused by accidental overserving of alcohol to a guest |
|
|
You make and sell goods, such as food, crafts, or beauty products |
Covers harm caused by the products you make or sell |
|
|
You rely on expensive tools, equipment, or inventory to run your business |
Covers movable business property in case of theft or damage |
|
|
You have employees at your business |
Covers job-related injuries or illnesses to employees while working |
Don’t forget: You’re never too small to need business insurance. The unfortunate accident + litigious customer combo can happen to anyone — yes, that includes you! Insurance is a financial safety net against risks that gives you peace of mind to focus on what matters: leveling up your business.
Your Next Step: Get an online quote for business insurance with Insurance Canopy. It only takes about seven minutes and is more affordable than you think! Our policyholders pay an average of $19/month for general liability insurance.
4. Monitor and Update as Your Business Grows
Risk management for small businesses is not a set-it-and-forget-it solution. You must constantly monitor your business for exposures. This includes any changes you make to your operations, new products or services you offer, or expanding to online sales.
As your business grows, so do your risks. Keep your risk reduction processes updated and review your insurance coverage to make sure you’re properly protected.
Your Next Step: Set a calendar reminder to reassess your small business risk management plan. Treat it like renewing your licensing or filing for quarterly taxes!
Insurance Canopy, Made for Small Businesses
No matter where you are in your entrepreneurial journey, Insurance Canopy is here to support your hustle with affordable small business insurance. We’re committed to uncomplicating insurance for you — because you have invoices, booking, and a bunch of other stuff to worry about.
For all your small business coverage needs, get peace of mind for the risks you can’t avoid and protect your big business dreams today!
FAQs About How to Reduce Risks in Small Businesses
What Are the Most Common Risks That Small Businesses Face?
Some of the most common risks small businesses face include:
- Liability claims from customer injuries, accidents, or property damage
- Professional mistakes or negligence resulting in lawsuits
- Property damage from fire or natural disaster
It’s essential to protect yourself from exposures like these by carrying business insurance with the right policy structure in case things go wrong.
How Does Insurance Help With Risk Management?
Insurance helps manage risk by shifting financial responsibility from your business to the insurer. If something goes wrong, your policy is designed to help cover the costs, so you can recover faster and avoid paying out of pocket. .
When Should I Consider Purchasing Business Insurance?
Right now! You should purchase business insurance as soon as you start offering services, selling products, or interacting with the public. Even small, home-based businesses face risks that insurance can help protect against.
Julis Navarro | Copywriter
Seattle-based copywriter and licensed insurance agent Julis Navarro leverages her love for yoga, dance, and wellness and holds a bachelor’s degree in journalism from Pepperdine University. Before working at Veracity, she wrote product and editorial copy, ranging from big-brand athleticwear descriptions to health and fitness curations, for online retailer Zulily. Fully trained on Insurance Canopy’s personal trainer coverage, Julis now writes to help match fitness professionals with their perfect insurance policies.
Seattle-based copywriter and licensed insurance agent Julis Navarro leverages her love for yoga, dance, and wellness and holds a bachelor’s degree in journalism from Pepperdine University. Before working at Veracity, she wrote product and editorial copy, ranging from big-brand athleticwear descriptions to health and fitness curations, for online retailer Zulily. Fully trained on Insurance Canopy’s personal trainer coverage, Julis now writes to help match fitness professionals with their perfect insurance policies.
