How an 831(b) Plan Can Help Your Small Business Face Its Biggest Challenges
Running a small business today can be especially challenging. You not only face the typical challenges business owners have confronted for years, like client attraction and retention, but there are additional threats today’s entrepreneurs must deal with.
One common way businesses survive a crisis is by having insurance covering their financial losses. But in many cases, traditional insurance is not enough, and that’s where 831(b) plans come in. Also known as captive or micro-captive insurance, 831(b) plans are designed to fill in the risk gap exposures of traditional insurance policies with tax-deferred dollars. Much like a 401(k) helps you set aside tax-deferred funds for retirement, an 831(b) plan helps businesses create a tax-deferred war chest for risks.
To find out more, I talked to Van Carlson, the founder and CEO of SRA, which provides tax-deferred risk mitigation insurance.
Rieva Lesonsky: What are the four major threats that face small businesses today?
Van Carlson: They are:
- Cyber insurance exclusions
- Pandemic losses
- Supply chain disruptions
- Bank collapses
These are uninsured losses—which can cripple a business.
Lesonsky: Let’s go into a little more detail. How do you convince small businesses that they’re at risk for cyberthreats? So many think they’re too small for anyone to care about.
Carlson: We have several real-life horror stories of our small business clients experiencing cybercrimes. In fact, in the last month alone, we saw two resulting in a $280,000 loss for both of them. For a big or small business, that’s a tough number to swallow. But for a small business, even a fraction of that can be devastating. There’s no shortage of news stories every day of cybercrimes, such as social engineering, ransomware, data breaches, and more. We see new clients coming to us with cyber fears because they have experienced [a cyberthreat] or see it as a top concern to protect themselves against.
Lesonsky: Do many small businesses even know about cyber insurance?
Carlson: Ten years ago, people might not have been aware of any kind of cyber insurance, but today, since cyber risks have skyrocketed, the majority do.
Lesonsky: Traditional insurance policies often have exclusions. What are they?
Carlson: Traditional insurance often excludes intentional acts. For example, if your bookkeeper gets a phishing email and wires money to a black hole, it’s only covered if they went through their written procedures to verify the vendor’s account.
Some business owners have cyber coverage in their general liability policy and assume they are covered. What they don’t understand is that not only are there notable exclusions, but there are sub-limits. For example, a company’s general liability coverage may be a $1 million limit, but its cyber coverage may be a fraction of that, leaving the business to cover the rest.
Another exclusion we see is coverage for notice. For example, in California, a business is required to notify all its clients that are potentially exposed to a data breach, which can be costly. Then, tack on hiring a crisis management team and the loss of income due to clients terminating business with you. Many traditional insurance cyber policies do not cover reputational damage or loss of income.
Lesonsky: What’s the best solution?
Carlson: The best solution is prevention. Invest in employee training, written procedures, and working with banking partners to enhance security, etc.
Have insurance to cover some of the financial costs in case the worst does happen. And an 831(b) plan can fill in the gaps where traditional insurance falls short through sub-limits, exclusions, and indirect losses and costs.
Lesonsky: If your business is still impacted by the pandemic, what can you do to recover to pre-pandemic levels? Many companies are already at that point, so how do you catch up?
Carlson: In 2008, many businesses were negatively affected by the recession, yet some thrived. Many of those successful companies had risk controls through their 831(b) plan to protect themselves from the "what ifs." As a result, those businesses were able to draw from their tax-deferred war chest and recoup losses when the economy dipped.
Lesonsky: What are some ways to plan for supply chain disruptions?
Carlson: Having more than one supplier in multiple locations is critical. For instance, we had a client who was reliant on only one denim wholesaler in China. When the pandemic hit, and China shut down, he still had orders to fill. This costly mistake meant he had to find new suppliers quickly. In addition, he had to pay a premium and air freight the materials because deadlines were approaching. Luckily, he used his 831(b) plan to pay for those extra expenses, but he learned an important lesson and now has multiple suppliers located around the world.
Lesonsky: Reactions were mixed when the Silicon Valley Bank collapsed. Some small businesses panicked, while others thought they wouldn’t be impacted because they weren’t VC funded. Is there a way to tell if your bank is in trouble?
Carlson: Many businesses will be impacted by the current banking situation. Banks in the U.S., outside of the 25 largest, account for 40% of all lending. The most significant likely impact on small businesses is credit tightening on these banks because of their liquidity problems.
We’re a big promoter of self-reliance among businesses, and a benefit of 831(b) programs is that you can use the reserved funds as your own bank.
