1. Prepare for financial setbacks. 

Most tech firms only have the basic amount of insurance coverage needed to fulfill investor demands, client needs, and any regulatory requirements, but no more. And when the budget needs trimming, it’s one of the first things to go. But if you get sued, you don’t have enough coverage, your company will have to bear the cost. Even if the claims are groundless, you’ll still have to divert time, money, and other essential resources towards clearing your name instead of business growth. And the consequences—financial setbacks, damage to reputation, and diminished goodwill—could make or break your business during economic slowdowns.

It’s easy to see insurance as a necessary evil or just another chokehold on the balance sheet, but it’s more along the lines of technology, human capital, or R&D; it’s a business investment that can play a pivotal role in protecting your financial well-being in face of unforeseen challenges. Just like your other investments, insurance offers a safety net that allows you to strategically navigate worst-case scenarios. That, in turn, enables you to pursue financial goals, like cutting costs, without needing to reallocate funds toward extensive legal counsel if you’re hit with a lawsuit.

PRO Tips:

While you don’t need to overburden your business with excessive insurance, aim for a balanced approach that considers the cost of premiums against the risks of being uninsured. And don’t just set it and forget it. Whether you’re cutting costs or making investments, regularly reassess and update your coverage as your organization—and your risks—evolve. The coverage you initially signed up for may not adequately protect against the added liability you take on as you adjust contracts, staff, and operations.

Here’s an example: for tech companies heavily dependent on digital operations, the risks posed by cyber threats are substantial, from software vulnerabilities, to AI, to MSPs, and more. For these reasons, buying Cyber Insurance should be considered an extension of your overall IT budget to help prepare for and recover from potential attack. A dedicated policy can help mitigate financial losses due to data breaches, cyberattacks, or other digital threats by covering expenses, such as forensic investigations, legal fees, customer notifications, regulatory fines, and more. Plus, most cyber policies include a range of services designed to expedite recovery after a breach, like VIP access to a breach coach, a remediation team, and PR experts.

RELATED: All About Cyber Insurance: What is it, What’s Covered, and Why Do You Need it?

2. Tighten up your accounts receivables practices. 

Clients might be facing their own financial hardships, causing delays or difficulties meeting payment obligations. If you’re short on staff, you might not have the time or support to settle invoices or investigate past-due bills. But if you’re not getting paid regularly, you could have trouble making payroll or rent, buying new equipment, or funding overhead expenses. Or you might try to make up the difference by taking on more work than your people can handle.

An effective billing and collection strategy is key to managing cash flow, establishing predictable revenue streams, and recovering lost funds. First and foremost, rigorously vet all clients before signing on. In addition to their reputation, look into their financial profile and determine if they have the resources to meet payment. Run regular credit checks and stay alert to any potential bankruptcies. Ensure all contacts have clear invoicing schedules, with payment instructions, interest terms, and strict credit policies and set up a retainer where possible.

PRO Tips:

Look into Trade Credit Insurance, which can protect and stabilize your cash flow by insuring your receivables and covering a client’s bad debt, including high-value and high-risk accounts. If a client defaults on their payment, the policy pays out a percentage of the remaining debt (up to the policy limit), mitigating the financial impact of delayed or defaulted payments and preventing disruptions; this is a vital tool for businesses struggling with liquidity.

Additionally, Trade Credit Insurance provides continuous credit monitoring services that can be used to pre-qualify and continually assess potential clients based on their creditworthiness. This way, you can vet prospects and make informed decisions about credit eligibility before entering a transaction, reducing the likelihood of taking on a risky client. You’ll continue to receive updates and insights about clients’ status throughout the policy period, allowing you to proactively adjust credit terms and take other measures if their financial situation deteriorates. In the event of a default, the insurer will assist in the collection process to help recover outstanding amounts.

RELATED: How Can Businesses Blunt the Impact of Bad Debt?

3. Manage investor expectations.

It’s natural for investors to feel uneasy in a shaky economy. Unfortunately, business leaders who are afraid of losing funding tend to inadvertently fan the flames by going silent or sweeping things under the rug. But the more you keep investors in the dark, the more nervous they’ll become—and springing bad news at the last minute is never a good idea. If your revenues are drastically lower than what you projected, investors who’ve put in millions to help you grow could sue you personally to recoup the funds.

If your company is facing challenges, transparency is key. Investors know that market fluctuations are par for the course and a little bit of honesty can go a long way to win trust. Keep them informed about your company’s financial health and changes in your business plan. Show them you’re not only aware of the risks, but willing to make tough decisions for long-term success. Clear and consistent communication can help you inspire trust, attract more support, and minimize the chances of a lawsuit.

PRO Tips:

For maximum protection, consider a Directors & Officers (D&O) Insurance policy to help you take more calculated risks. D&O Insurance defends your business leaders and board members if they’re personally sued for any actual or alleged wrongful acts in managing the company, such as poor governance, failure to act, financial losses, misallocation of funds, and more.

If you’ve invested a lot of your resources into your tech firm, this coverage is critical to protect both your corporate and personal assets, particularly when making decisions during economic crises. That way, you can confidently engage with investors without the constant fear of legal repercussions or being sued personally, leading to more constructive and open communication.

4. Assess your financing strategy. 

Many tech firms raise funds by issuing stock to private equity investors. However, these deals are losing their appeal in our current climate, where investor confidence in quick and successful returns is dwindling. With reduced investor appetite, many firms are shifting from equity financing to more traditional loans through debt-based financing.

Debt financing is less costly upfront and allows you to retain ownership, but keep in mind: you’ve got to pay it back—with interest. And unlike equity financing, which offers more financial flexibility, you’ll have to follow a strict repayment schedule and provide regular reports to the bank, regardless of how well your business is doing. If you miss a payment, the lender reserves the right to call the loan, posing risks to smaller or newer businesses that don’t have a consistent cash flow. Failing to meet debt obligations can impact long-term viability and result in financial difficulties or bankruptcy.

Ultimately, the right financing strategy for your business will depend on your needs, operations, and budget. A well-rounded approach will include a mix of equity- and debt-based options; diversified funding sources ensure a flexible financial model that can adapt to change. Before making any shifts, carefully analyze the potential risks to ensure you can maintain a steady cash flow and meet payments.

PRO Tips:

Directors & Officers (D&O) Insurance can provide a sense of security here as well. With a backing of a D&O Insurance policy, you might feel more empowered or willing to pursue new financing opportunities, knowing you’re protected against personal liability. This assurance will allow you to focus on strategic aspects of financing, making negotiations and decisions smoother and more productive.

Additionally, when considering financing options such as loans, investments, or partnerships, having D&O Insurance can be reassuring for lenders, investors, and other stakeholders. It shows that your company is taking proactive steps to manage risks effectively, boosting the credibility and appeal of your financing proposal.

RELATED: D&O Insurance: Sail Through Troubled Waters with Confidence

5. Handle staff downsizing with care. 

Workforce reductions can be a quick solution in a tightening economic cycle, but they can have major repercussions. Team members who leave on bad terms or have trouble finding a new job might become hostile, leading to allegations of mismanagement, wrongful termination, or unfair treatment against your company. Turnover can also increase your cyber risks if leaders neglect to disable access controls or confiscate and wipe company-provided devices. And finally, keep in mind: cutting your workforce doesn’t always translate to reduced costs. While you can backfill roles, consider the effect layoffs will have on your remaining staff and their ability to expand your business and deliver the same level of service (even more if you’re consistently overpromising to clients).

Weigh your options carefully before you resort to layoffs. Make sure you’re using the talent you already have effectively; it might be more cost-effective to shuffle or retrain existing staff than hire new folks later on and start from scratch. If layoffs are inevitable, act thoughtfully and responsibly. Treat departing employees with respect, empathy, and transparency and part on good terms, if possible. Set up proper offboarding protocols to make sure you’re not skipping steps, including an exit interview, data recovery and remote wipe policies, and termination paperwork.

PRO Tips:

In today’s business environment, Employment Practices Liability (EPL) Insurance is vital for every organization. Regardless of how well you manage the situation, there’s still a chance of lawsuits cropping up, which can undermine any downsizing efforts to save money, since you’ll end up pouring the money you saved back into legal defence. In addition to employee allegations, persistent layoffs could also give way to social media smear campaigns or complaints filed with the Human Rights Tribunal, especially if you haven’t provided adequate notice or proper severance packages.

With EPL Insurance, you’ll be protected against claims from past, present, and prospective employees, such as discrimination, harassment, wrongful termination, failure to employ, and more. Plus, this policy typically comes bundled with your D&O Insurance, creating a comprehensive approach to address the specific challenges associated with downsizing.

RELATED: What does turnover have to do with business liability?

How can we help you?

For more guidance on risk management, consult with a dedicated advisor that specializes in the Technology sector, like PROLINK. With over 40 years of experience and over a decade of serving tech firms, we’ve weathered countless economic cycles. We can help you navigate industry trends, determine which budget cuts are worth it, and implement measures to mitigate loss. Our dedicated team of advisors will:

• Identify exposures and keep you informed about emerging threats, legislation, and innovations that could affect you;
• Share what steps other firms in your industry are taking;
• Provide you with comprehensive insurance and risk management solutions that align with your business goals and budget;
• Regularly reassess your exposures and readjust your strategy to scale with your leadership, people, and processes.

With greater insight into your threat landscape and a dedicated partner by your side every step of the way, you can retake control of economic uncertainty and focus on what’s most important: your business. To learn more, connect with PROLINK today.