Besides providing access to credit, insurance is criticalto SME survival

Small and medium enterprises (SMEs) have long been touted as the real engine of Kenya’s economic growth. SMEs account for a growing share of gross domestic product, form the bulk of business activities across sectors, and are a strong catalyst for employment and wealth creation. But they are often considered too risky and many don’t survive past five years.  

The growth and survival of SMEs have a positive impact on the country’s economic growth and sustainable development. Given the high mortality rate among small businesses, there is need to explore ways of strengthening their survival capacity. 

Insurance is one way to boost chances for SMEs by acting as an effective risk management tool. There are two approaches to this issue. First is to look at insurance as a way of enhancing the credit risk profile of a small business. The second entails using insurance as a tool to protect against potential risks that could spell financial disaster for a business, large or small. 

How does insurance strengthen a business from a credit perspective? Businesses need positive cash flows to acquire crucial inputs, buy assets like equipment and vehicles, meet operating costs and pay employees. A business will therefore need to borrow money from time to time to bridge its financial needs.

Banks and other financial institutions however tend to shun SMEs owing to their risky profile. This is accentuated by lack of an effective risk management strategy. Yet access to finance has been cited as a major factor determining the survival of SMEs. Small businesses need optimal funding to grow and expand. Failure to access financing therefore undermines their long-term viability.

Insurance enhances the credit worthiness of SMEs by improving their risk profile. For example, one would hardly expect a bank to lend to a manufacturing firm that has not insured its machines against risks such as fire or theft. Insurance more or less underpins business continuity. No financier would want to put their money in a business that would collapse at the slightest disruption no matter how attractive the returns.   For this reason, SME owners should not view insurance merely as an unnecessary expense or luxury but as a business survival strategy. Investing in credit risk profile thus scales up their ability to attract financial support from creditors and even investors.  

Risk profile

We also need to distinguish insurance as a tool to enhance credit risk profile and credit default risk cover. The latter shields lenders from risks associated with non-performing loans. It acts as a credit risk mitigation tool as well as incentive for financial institutions to lend more to small business, traditionally considered riskier compared to government or large corporates.

The second aspect of insurance as a business survivaltool is in providing a cushion against natural and man-made risks that could undermine the long-term viability of a firm. Like all businesses, SMEs face myriad risks threatening their survival including floods, drought, theft, accidents and fire. Even non-payment by a customer is a financial risk to a small business. 

Fortunately, various insurance products covering such risks are available in the market. They cushion firms against financial disaster occasioned by the risk hazards. Lack of awareness of such products and more importantly, the role of insurance as a financial risk management tool, remains a major challenge.

The business owner should begin by ascertaining the type of insurance cover they need. Most general insurance policies cover risks like fire, theft, accidents at the workplace and so on. As business grows so the scope of risks it faces thus necessitating continuous review and assessment of evolving needs. 
  -The writer is the managing director, Kenya Orient Insurance. Email: mmuindi@korient.co.ke