How can your small business avoid or survive a disaster?

by Reed Richardson

As many small business owners in Nashville, Tennessee and along the coast of the Gulf of Mexico could no doubt tell you right now, disasters, whether natural or man-made, can and do strike anywhere at anytime. Or, as former SBA Administrator Hector Barreto noted recently: "No one is insulated from the threat of losses caused by wind, storms, floods and wildfires, power outages, and other natural and man-made disasters. These catastrophes should remind us of the need to be prepared, to have a plan not just to survive a disaster, but to recover quickly."

This last point is perhaps the most critical, since long after the rescue efforts have concluded, the waters have receded, or the environmental cleanup has finished, the devastating economic impact of most disasters will continue to ripple through the local business communities of the recovering areas. And that ripple effect exacts a heavy toll. In fact, research by the Institute for Business and Home Safety (IBHS) finds that one out of every four businesses forced to close their doors due to a major disaster never open them again. Businesses with no disaster plan in place ahead of time fare even worse, according to data from the Gartner Group, with 43 percent of those shuttered companies never reopening.

Small businesses are particularly vulnerable to disasters, since they typically have sparse resources, less reserve capital, and fewer employees and managers experienced at working through a crisis. Yet paradoxically, smaller companies also tend to be the least prepared when disaster strikes; surveys from the Gartner Group estimate that only 35 percent of small and mid-sized businesses have established disaster recovery plans. But by not preparing a survival and recovery plan ahead of time, small businesses could be inviting a greater disaster should a catastrophe befall their company.


Defining Disaster
While state and federal governments have very specific definitions of what constitutes a disaster--designations that have important ramifications for business owners viz a viz post-disaster aid and recovery funding--business owners should favor a simpler description when trying to prepare for the unexpected. "We suggest thinking of ‘disaster' as any event that prevents or interrupts your business from delivering its goods and services according to its customers' expectations," explains Diana McClure, Business Resiliency Program Manager for the Institute for Business and Home Safety (IBHS). This broader definition, she notes, captures more mundane--and much more likely to occur--events like structure fires, computer hard drive crashes, and sewer main backups, disasters that may not make national headlines but that can easily bring a small business to its proverbial knees.

What's more, small business owners should keep in mind that, in today's increasingly interconnected economy, your business could get blindsided by a disaster without sustaining any actual lost assets or physical damage. One clear example of this disaster-by-proxy scenario is currently playing out along the Gulf Coast, where thousands of tourism-based businesses as well as untold shrimping and fishing concerns have been effectively shut down by the ongoing oil spill that is encroaching upon the area's public beaches and territorial waters. "There's no insurance for that," notes Insurance Information Institute (III) vice president Loretta Worters.

Though the devastating financial losses sustained by these Gulf Coast businesses won't be covered by insurance, those companies may be eligible for governmental assistance precisely because the spill site has been declared a federal disaster area. Those now struggling small businesses along the Gulf Coast, for example, may be eligible for the Small Business Administration's Economic Injury Loan program, which offers up to $2.0 million in low interest loans per company. Businesses that have also sustained physical damage within a federally declared disaster area, like those recently flooded out along the Nashville waterfront, may also qualify for a SBA Physical Disaster Recovery Loan, which has similar terms. (For more on SBA disaster assistance, go to


Disaster Due Diligence
One common reason small businesses fail to adequately prepare for disasters simply involves a lack of time and manpower. "Large corporations usually have dedicated continuity planners or risk managers on staff, but in most small to mid-size companies, the risk manager is often the owner or CEO," McClure points out. Adding yet another task to a busy small business owner's inbox can make for a convenient excuse not to take up the project at all. But drawing up even a rudimentary disaster plan is well worth the time. "Half the battle is finding a sense of urgency and the value to doing the planning ahead of time," McClure adds.

One way to find value in disaster preparedness is to use the process to find additional returns on investment. "Many small businesses go through the process and, along the way, they identify ways to improve efficiency or eliminate redundancies in their business," McClure explains. Also, she counsels small business owners to think of disaster preparedness as a way to potentially enhance their business's reputation or gain a competitive advantage. "Wouldn't you like it if your company could open its doors days or weeks ahead of your competitors after a disaster strikes? And if it does, wouldn't that be something you could use to sell to new customers?"

Still, many small business owners may balk at the prospect of tackling disaster and continuity planning because they lack familiarity with the topic, McClure acknowledges. So to help smaller companies get started, her non-profit organization has developed "Open for Business," a free disaster preparedness and recovery guide that entrepreneurs can either download and print out or work through online. "Open for Business" allows small business owners to do a quick self-assessment of their current preparedness level and then follow up with a step-by-step guide that addresses topics like backup operations plans and alternate worksites, redundant vendor sourcing and remote data archiving, emergency safety procedures and employee contact lists, and even crisis-based public relations tactics. "It forces your business to think about every one of its obligations-legal, regulatory, financial, contractual-and the time frames associated with each," McClure notes. (To view IBHS's "Open for Business" guide online, go here: or to download the pdf version, go here:


Unraveling your insurance needs
For any business, a particularly critical element of disaster preparedness involves insurance coverage. "A lot of small businesses have nothing more than a standard business owners policy, or BOP, which often has some basic coverage for business interruption included," McClure notes. Business interruption coverage, or extra expense insurance as it's also known, helps defray repair expenses, ongoing operating costs, and lost profits for a set amount of time after a disaster (usually ranging from three months up to one year). "But it's important to talk to your insurance agent about your individual business's needs ahead of time so that you don't find out you lack adequate protection after the fact," she adds.

This can be especially true for very small and home-based businesses that haven't yet insured their company. "Small, home-based businesses are typically trying to save money by going without any kind of insurance coverage, but they're operating under a false sense of security," says the III's Worters. "That's because losses from a disaster for a home-based business are not covered under a standard homeowner's policy."

Similarly, small companies that rely heavily upon a single vendor or hard-to-source component might be lulled into thinking that their current insurance policy will adequately protect them should a disaster suddenly shut down their key supplier. But it won't. So, for those businesses with a greater inherent risk to their supply chain, experts like Worters recommend buying contingent business interruption insurance. This coverage will inject cash flow into your business during an unexpected vendor drought, helping you literally keep the lights on and, if necessary, locate an emergency alternative supplier.

"If you fail to plan adequately for a disaster and how to stay afloat afterwards," concludes Worters, "almost no business will be able to sustain itself for more than a year or two if it has been badly damaged."

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