Complete guide to small business insurance

Small business ownership is surging in the UK, and while obtaining insurance may not be the most glamorous part of starting a business, it’s a necessary step in protecting your venture against unforeseen risks, potential financial losses and fines. 

However, knowing where to start is hard, especially for first-time entrepreneurs. With every small business facing a different set of risks and challenges, no two insurance policies will look the same. Confusion over knowing which policies to prioritise is the biggest reason new business owners put off buying insurance, making understanding your options essential in your ventures’ early days. 

To help navigate these complexities and start your business on the best footing, this guide carefully breaks down everything you need to know about small business insurance, including which types of coverage you actually need, what’s a bonus, and how much a comprehensive policy could cost you.

What is small business insurance?

Also referred to as commercial insurance, small business insurance is a broad category of policies designed to protect businesses against financial loss and liability. These policies act as a safety net, helping to protect your business against a range of unforeseen events and legal liabilities, including cyber attacks, business interruption, employee misconduct, and media licensing. 

Rather than a single product, it’s a flexible collection of policies that can be tailored to the specific needs of your business. The right insurance for you will be dependent on a number of factors, including your industry, the size of your business, and your hiring needs. For example, the insurance package of a nail salon with multiple employees will look a lot different from that of a freelance graphic designer working from home. 

Obtaining the right business coverage offers precious peace of mind and prevents you from being vulnerable to significant financial setbacks. This is why small business insurance should be seen as a strategic investment in your business’s future, rather than just an expense.

What types of small business insurance are there?

In the UK, there is a wide variety of insurance options to consider. In the table below, we outline the different types, addressing what type of business they’re best suited for, whether they’re mandatory, and what they typically cover.

What business insurance is legally required in the UK?

Not all business insurance is mandatory. However, any business that hires employees is legally required to invest in Employer’s Liability Insurance to cover the cost of compensation and legal fees if an employee becomes ill or is injured as a result of their work. 

Aside from this general coverage, the insurance you’ll need will depend on the nature of your business, with some industries requiring specific licensing or insurance for businesses to operate legally. 

For example, to comply with beauty salon regulations, personal service businesses will need to register with their local councils and protect themselves with treatment liability insurance if they provide treatments to clients. For-hire transport services, on the other hand, specialist permits like operator licenses and taxi insurance will be required to operate legally. 

Learn more about how to start a taxi or private hire firm in our comprehensive guide. 

Lots of forms of coverage, like Public Liability and Professional Indemnity Insurance, are strongly recommended by professional bodies and clients. Securing them is often a stipulated contractual requirement, so it’s always recommended to carefully review the terms and conditions of your contracts before agreeing to any work.

Your business’s intellectual property is just as valuable as its physical assets. So, beyond insurance, registering for a trademark with the Intellectual Property Office (IPO) helps to legally protect your brand by giving you the exclusive rights over your name, logo, or slogan. If you haven’t already, registering your business name is also a foundational step involved with starting a business, as it prevents other businesses from using your name. 

How much does small business insurance cost?

Since each business will require different forms of insurance, and the price of coverage is dependent on many factors, there’s no one-size-fits-all price. 

To help you understand how much these policies could cost you, here’s a price summary of the most common forms of insurance for small businesses:

• Employers’ liability insurance – Prices start from £100 per year per employee in office-based roles, with prices increasing for more physically demanding or high-risk roles. 
• Public liability insurance – Prices start from £60 per year for self-employed individuals in a low-risk trade, while costs could increase to several hundred pounds for employees in industries with higher risks. 
• Professional indemnity insurance – Prices start from around £70 per year for freelance consultants with low turnovers, while a larger firm in a high-risk profession like engineering or architecture could pay upwards of thousands of pounds each year. 

Based on the going rate of insurance, small businesses can expect to pay anywhere between £500 and £1,500 annually for basic cover, with costs increasing for larger businesses in higher-risk sectors.

For example, a small cafe with three part-time employees could expect to pay £700 to £900 per year. This includes approximately £350 a year for employers’ liability insurance for three part-time, low-risk employees, £150 a year for public liability insurance, and around £200 to £400 a year for business interruption and contents insurance to protect for events like theft or flooding. 

On the other hand, a higher-risk construction business with two employees could expect to pay anywhere up to £1,000 per year. The cost of employee liability insurance is steeper due to the higher-risk environment, and they could also likely require tools and contract insurance to cover their equipment, which could add another £300 to £500 to their premium. 

How do I choose the right insurance for my business?

There are no hard and fast rules when it comes to choosing forms of coverage, but here are some useful tips to help make your decision easier. 

• Prioritise mandatory insurance: obtain need-to-have coverage, like employees’ liability coverage or music licensing if you plan on playing music, before considering non-essential options. 
• Assess your risks: identify the specific risks your business faces and work backwards from there. E.g., does your business make electrical goods, offer professional advice, or employ staff?
• Consider contractual obligations: review contracts with your clients, suppliers, or landlord, as they may stipulate the type of insurance you must obtain.
• Err on the side of caution: if you’re on the fence about obtaining a type of insurance, it’s always better to be safe than sorry. If an unforeseen event arises, you’ll be glad you protected yourself against a potentially devastating financial impact.
• Always read the small print: comb through the terms and conditions with a small tooth comb. This will help you understand exactly what’s covered and what’s excluded within the coverage.
• Assess your situation regularly: your risks and needs will evolve, so it’s essential that your insurance reflects these changes. Review your policies annually, at least, to ensure your coverage remains relevant. 

Where can I buy small business insurance?

Decided on which forms of coverage to lock in? There are several reliable avenues for purchasing insurance for business owners. 

Most leading insurers in the UK have dedicated options for small business coverage, including major providers like Direct Line for Business, AXA, and Hiscox. Oftentimes, these companies let you build custom packages, helping you secure everything you need and nothing you don’t. 

To shop around for the best value coverage possible, we also recommend using comparison websites like Simply Business. This platform acts like a middleman, giving you a way to compare quotes from a wide range of providers, without having to refer to their websites manually. 

While choosing the cheapest option might be tempting, it’s important to carefully review its details before committing. A low-cost policy is likely to omit certain forms of coverage, leaving you vulnerable to financial setbacks from unexpected claims. These policies also tend to come with higher excesses, so they often end up providing you with much worse value down the line.

What happens if I don’t have the right small business insurance?

Failing to secure the right coverage for your business can result in serious financial and legal consequences. 

A single incident, from an unexpected event like a fire to a client suing you for professional negligence, could result in a compensation claim that you simply aren’t equipped to handle. In worst cases, the fees associated with legal battles and settlements could force your business into bankruptcy, while your personal or business assets could also be at risk.

Furthermore, choosing to forgo mandatory insurance like Employer’s Liability insurance could result in significant legal penalties, with the Health and Safety Executive (HSE) having the authority to issue fines of up to £2,500 for every day you’re not covered. This also applies to other forms of essential coverage, from motor insurance to TV and music licensing. 

Put simply, operating without the right insurance is like walking a tightrope without a safety net. Covering your bases with insurance early may not be exciting, but it’s a vital investment in the long-term health of your business.

Conclusion

For new businesses, every penny needs to be accounted for. However, small business insurance isn’t just an extra cost or piece of red tape; it’s a strategic safeguard to protect the venture you’ve worked so hard to build. 

Securing the right insurance early on in your business’s journey gives you the confidence to focus on growth, knowing you are protected from unforeseen events, sky-high legal fees, and financial disaster. It also establishes professionalism from day one, helping you appear trustworthy in the eyes of clients, partners and the public. 

Navigating the bureaucracy doesn’t have to be daunting, either. Simply start by identifying your non-negotiables and using tools to compare the best options, before regularly assessing your coverage as your business evolves.