Sunday, March 07, 2021 / 10:00AM / by Chinyere Onyia / Header Image Credit: Brand Spur
Small and medium-sized enterprises (SMEs) tend to cycle outside the insurance loop for reasons ranging from ignorance to cost. Corporate calculations at the lower part of the enterprise ladder appear to be different from calculations nearer the top, resulting in smaller enterprises preferring to take bigger uncovered risk. Insurance for small firms is like dashing into the rain without an umbrella the consequence could be uncomfortable, but the choice is more the result of the lack of knowledge than the lack of money.
Analysts in growing numbers are beginning to realise that small businesses do not insure their assets not because they do not want to, but because they cannot afford to, or so they think. The problem with small enterprise insurance appears to be a perception of cost rather than an understanding of loss. Smaller-sized entrepreneurs tend to cost their goods or services without considering cost of insurance, thereby undervaluing the cost of their goods or services. The consequence is that in a time of crisis they end up sorry rather than safe.
Data from the Nigeria Bureau of Statistics (NBS) show that local SMEs contributed about 48% of the national GDP in the last five years. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, by number of enterprises. The NBS report suggests that SMEs support industrialization and employment. More advanced economies have equally used SMEs to grow industries and promote development.
What is an SME? Running The Numbers
SMEs may look trivial, but they are the bedrock of several stable global economies. Base research data indicates that the total cost of starting a micro enterprise (including working capital but excluding cost of land) is N5m but not exceeding N50m, with a labour size of 10 workers. The total cost of starting a small enterprise (including working capital but excluding cost of land) is between N5m and N100m, but not exceeding N200 million, with a labour size of between 11 and 50 workers, while the total cost of starting a medium-sized enterprise (including working capital but excluding cost of land) is between N100m and N500m, with a labour size of between 51 and 200 workers.
Funding SMEs; The Search for Longevity and Stability
SMEs are usually faced with financial dark holes which have persistently led to their failure. Despite a few federal and state-sponsored funding schemes for smaller businesses, several SMEs have hit the deck as they quickly run out of cash or find themselves buried under a heap of commercial debt. Funding has been a key operational problem for SMEs as poor management capacity, weak record keeping, lack of operational transparency and no collateral conspire to keep SMEs out of the formal banking sector credit market. Aside the lack of funds, other challenges that face SMEs include the lack of skilled manpower, multiplicity of taxes, high cost of doing business, and the low threshold for absorbing economic shocks.
...The Other Problems
Additionally, SMEs are confronted with risk-related issues ranging from, changing taste and preferences of consumers, economic vulnerability, infrastructural constraints such as poor power supply, inadequate supply of potable water, poor access roads, high cost of equipment, high rate of domestic inflation, , management risk, marketing risk, reputation risk, natural disasters such as earthquakes, fire outbreak, and floods (especially in the farm belts), social unrest, and arson (like during the EndSARS protests).
As an entrepreneur the best way to manage risk associated with a business (asides risks associated with managerial or operational competence) is by getting an insurance cover. It is important to note that risks might be the reason why a venture capitalist would not invest in a business. Nevertheless, before getting an insurance cover it would be reasonable to profile the business's risk to determine the appropriate insurance policy to buy. Admittedly, some of the risks of businesses are unforeseeable ('black swans') while others are known but the timing is unpredictable ('grey swans'). In identifying risks, it is important to understand that SMEs are businesses in the private sector, and they cut across all industries so, the nature of risk varies according to the industry. The responsibility falls on the business owner to identify the risk associated with the industry and purchase insurance that reflect those industry-specific risks.
Some risks are uninsurable, in this situation the entrepreneur would do well to still approach an insurance professional to help in assessing the impact of an unforeseeable loss on the type of business the entrepreneur is engaged in and review the best risk-protection strategy. In such situations, small businesses could self-insure by saving money for possible future losses.
A variety of insurance schemes or plans are critical to risk protection of SME businesses the kinds of risk protection arrangements include: Liability Insurance, Business Property Insurance, Workers Compensation Insurance, Health Insurance, Life Insurance and so on.
All About the Plans
SMEs require standard fare insurance protection schemes some of which include the following:
Fire and Risk Insurance Plan
Fire and Risk Insurance is a vital insurance plan for SME in Nigeria. It covers your business against, earthquakes, fire outbreak, tsunami, flood, social unrest, intentionally inflicted damages that may occur in the line of your business. An example was what happened during the end SARS protest that affected business premises and markets. This insurance plan will protect your business against loss or damage because of rain, flood, and storm. Under this plan, your insurer will pay back all your losses, giving you the capital, you need to resuscitate your SME.
Professional Liability Insurance Plan
Professional Liability Insurance plan covers business owners from claims or legal liabilities from their clients. It protects professional SMEs business against laxity claims due to damage that results from mistakes or failure to perform and each industry has its own set of concerns that will be addressed in a customized policy written for a business. This plan is crucial because claims can arise because of error, laxity, or omission during carrying out your professional duties. This insurance plan is for small business that sells professional skills or knowledge. For example, doctors' lawyers, accountants, or other such professions, having this insurance cover will protect you against damages or claims brought by a client in a court of law within Nigeria. The policy also covers financial losses or legal costs.
Product Liability Insurance Plan
This type of insurance plan for SMEs in Nigeria protects their business from liabilities, claims or damages that may erupt from the use of its products. There are some insurance companies in Nigeria that offer this to SMEs. Under this type of policy, financial coverage is provided for SMEs owner, tailored specifically to his or her specific type of product. Product liability insurance is important, especially for SMEs in Nigeria that manufactures products for sale on the general market.
Business Interruption Insurance Plan
Natural disaster or bad government policies are the various issues facing SMEs. Small business usually goes through financial crisis during course of these issues. Business interruption Insurance plan compensate this business for its lost income at such time. This policy applies to companies that require a physical location to do business, such as retail stores been demolished by the government because of ongoing construction throughout the state/paving new roads.
New business owners usually witness the destruction of their hard work, so a business interruption insurance plan will take care of all the cost related to the damage. It also replaces business income lost because of fire outbreak, lightning, explosions, or some other specified events which disrupt business operations. Depending on the insurer, this SME Insurance Plan in Nigeria can sometimes cover profits that would have been earned had business operations not been disrupted, operating costs based on previous statements of costs and employee wages. SMEs in Nigeria currently that have this policy will undoubtedly recover faster from the coronavirus lockdown losses and the #EndSARS protest because they would receive the settlement from their claims.
Commercial Property Insurance Plan
Commercial property insurance plan covers all business equipment, signage, inventory, and furniture in the event of a fire outbreak, or during a crisis. The extent of the protection given by this SME insurance plan depends on the standard each policy and therefore you should go through your contract very carefully. If the property you want to be covered is not protected, do not be afraid to insist it be included or to look for a new insurer. Also, because of this pandemic, many SMEs in Nigeria are operating remotely. If you are operating your business out of your home, ask your insurer for additional insurance to cover your equipment and inventory in the event of a problem.
Goods-In-Transit Insurance Plan
For those running SMEs in Nigeria focused on hauling of goods from one city to the next, then one would consider protecting goods on the road with this kind of insurance plan. Due to the poor states of our roads, many accidents take place each day and almost always involve lorries and cargo trucks spilling over their contents on the streets.
The goods-in-transit insurance plan covers your goods from such perils on the load so that even if you lose the goods in transit, you will not lose your money's worth as well. It also protects your goods against fire, theft, or accidental damage while the goods are being loaded or unloaded, or whilst temporarily housed within the general course of transit.
Back Cover-Planning the Future, Protecting the Business
Ultimately SMEs must grow their businesses with an eye on sustainability. To ensure that unforeseen and perhaps unknowable events do not terminate the lives of the enterprises, SMEs need risk protection provided by insurance arrangements.
If businesses and their owners intend to last into the future, then they need protection schemes that provide opportunities to reduce the impact of shocks that could occur in the corporate lifecycle. Ignorance of insurance becomes a poor excuse when disruption knocks at the door, sensible business practice is about planning and a disaster recovery plan when life's lightning bolts strike. Preemptive business action is not about money but about knowledge.
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