Over 11 million home-based businesses exist in the U.S. today. In fact, 10 percent of all households reportedly run some sort of home-based business. Working from home does help keep costs down, provides greater control of one’s time, and presumably brings in some cash. However, many home-based businesses make themselves vulnerable and have avoidable financial problems because they operate without business insurance, following local zoning or developing a plan for growing the firm.
There are three main areas in which many home-based businesses fail to operate like a traditional business. Business people who work from home do not always operate like a traditional brick-and-mortar business with a clear business plan, business insurance protections and knowledge of zoning in their neighborhood. These are some key issues many face.
Insurance: Forty percent of those who operate home-based firms believe their homeowners or auto insurance will protect their business activities and assets. However, the reality is that the business is probably not insured. According to an article in Business2Community, there is an insurance gap home-based businesses face because the homeowners’ insurance excludes business-related claims. Additionally, any merchandise stored at home or in the car will probably not be covered for theft. Liability coverage (such as for errors and omissions) is another area those working out of their home need to consider whether they are working as a bookkeeper, computer consultant, Web site designer, or independent contractor.
Home-based businesses need the correct insurance protection for based on the size and type of business. Make sure to find an insurance broker who has worked with countless small businesses in the particular field to make sure the right types of insurance products are addressed. These can include:
- In-Home Business Policy: Smaller in-home business may get away with a simple endorsement to an existing homeowners insurance policy, particularly to cover equipment like computers or construction tools, and greater liability coverage.
- Business Owner’s Policy (BOP): This type of bundled package policy is designed for small or medium sized businesses. It provides coverage for liability, business property and business income losses due to covered events.
- Business Interruption/Continuation Insurance: This coverage replaces income and pays for expenses that continue to accumulate in case of a covered loss.
- Business Property Insurance: This would cover stolen merchandise, damaged technology equipment, and other protection for lost inventory and income.
- Small Business Liability Insurance: Errors do happen, so businesspeople and contractors of all types need liability coverage for potential client losses and even punitive charges. Additionally, specialized coverage may be needed depending on the type of business, such as a day care liability, independent contractor insurance or cyber liability.
- Commercial Auto Insurance: Commercial auto insurance may be needed depending on how the car is used or if transporting people is a common business requirement.
- Disability Insurance: Business owners need to be concerned if unable to work and their only revenue is derived from their efforts.
- Life Insurance: If the business income is needed to support others, life insurance should be purchased, particularly if heirs will pay inheritance tax on the business. Also, if the firm is a partnership, “Key Person” insurance on each partner’s life would allow the surviving partner to keep things going.
Zoning Concerns: Working from home is pretty common nowadays, but zoning restrictions and city ordinances can impact operations depending on the types of home-based businesses. According to Business2Community, they include limits on numbers of employees, parking, business license requirements, and more. If the business stores items on the property or needs signage, there could be additional rules. Research what is acceptable in the area before being forced to move the business or being hit with fines.
Plans for and Financing the Future: Every business should have an organized plan that addresses marketing, equipment needs, potential growth and finances. However, many businesses operate on a day-to-day basis. Whether the plan is to remain an independent operator, or grow from operating in a garage into the next Apple, every business should take time to plan. What will future space, equipment, staffing and money needs be? Planning now prevents hiccups down the road. Additionally, make sure to account for business expenses to ensure that small business and personal taxes are handled appropriately.
Financing growth for home-based businesses can be difficult but it is not an insurmountable obstacle. While federal agencies do not provide grants for starting home-based firm, there are some low-interest loan programs that help individuals obtain startup financing available via the U.S. Small Business Administration. Financial problems plague many home-based businesses but they do not have to be and are avoidable with careful planning.
By Dyanne Weiss