Underinsurance is a growing problem for smaller firms and the likelihood of larger bills in 2026 is threatening to make it even more serious. In a challenging climate, how can businesses manage insurance costs while safeguarding cash flow?

How bad is the small business underinsurance problem?

It’s fair to say that commercial insurance isn’t a glamorous subject, but it is without a doubt a very important one. The failure to properly insure a business is a huge risk, with a lack of cover making firms incredibly vulnerable. This is why the results from a recent study from Hiscox showing that small businesses are widely underinsured is so alarming. Even more so given that this is a persistent issue according to the company’s Global Protection Gap Report.

In the study, despite most business owners admitting that potential threats, including theft or damage to property, cyber-attacks and workplace incidents, kept them awake at night, many firms don’t have adequate coverage. This includes professional indemnity, public liability, property and employers liability insurance, without which firms are vulnerable to claims linked to bodily injury, property damage, client lawsuits and employee complaints.

Cyber-attack insurance should also be mentioned, thanks to the growing threat that such incidents pose to small businesses. While more businesses are getting this type of cover, the level of insurance in the small business sector remains a matter of concern, with a significant number of companies not yet choosing to get this protection.

What is the reason behind small firm underinsurance?

What is behind this underinsurance issue? While a lack awareness, understanding and training are likely to be key factors, a major underlying cause has to be cost. In a climate where smaller firms have been battling severe headwinds persistently for years and margins are stretched to breaking point, it is hardly surprising that they are proving reluctant to invest, even in essential products and services.

However, firms still have to find a way to balance spend on investment with protecting cash flow, not least as the cost of commercial insurance is forecast to rise in 2026. Small businesses are being warned to expect higher premium over the next 12 months thanks to a combination of increasing repair costs, inflation and a rise in the number of claims.

Notably, this increase comes despite considerable price rises in 2025. According to the latest Premium Credit Insurance Index, more than half of small businesses revealed that their commercial insurance bills had risen over the last year, with the increase significant for 10% of them.

How alternative finance can help with commercial insurance costs

Given that affordability is a key issue when it comes to spending on commercial insurance, including essential cover, access to finance is critical if small businesses are to find a way to make sure they have the level of protection that they need. However, caution from traditional lenders is making this more difficult than ever.

Small business lending from traditional sources remains subdued in 2026, with almost 40% of firms finding accessing affordable finance one of their biggest challenges. Highlighting the scale of the problem, there has been a call for the introduction of legislation that would require banks to increase access to low-cost lending for small businesses.

It’s tough going for small businesses. And this is where alternative finance can help.

Against this backdrop, services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in the current funding climate. These alternative finance facilities, which offer a more easily accessible, affordable and personalised approach to lending, are helping small businesses survive and target recovery, stability and growth.

Small firm finance options for commercial insurance investment in 2026

The recently released figures on commercial insurance coverage in the small business sector and the rising cost of insurance premiums point to a(nother) looming crisis for these firms. Yet, despite the pressure on cash flow, businesses have to find way to invest.

This is why it is important that key decision-makers are aware of all the finance options available to them in 2026, including the services of alternative lenders.

To find out more about A&T Business Associates services, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.