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The Financial and Legal Costs of ID Theft to Small Businesses

Andrea Lacey


  • The cost of identity theft extends beyond just financial losses. It can also lead to legal consequences and irreparable damage to a business's reputation.
  • Identity thieves use a variety of methods to steal information, including phishing scams, malware attacks, and the physical theft of devices.
  • Read on for the preventive measures that business owners can take to minimize the risks and repercussions of identity theft.
The Financial and Legal Costs of ID Theft to Small Businesses

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Identity theft is an ever-present threat in today's digital age, and it can have a devastating impact on small businesses.

The cost of identity theft extends beyond just financial losses. It can also lead to legal consequences and irreparable damage to a business’s reputation.

As a small business owner, it is crucial to understand the potential risks and costs associated with identity theft and take proactive measures to protect your business.

In today’s post, we’ll give an overview of the financial and legal costs of identity theft to small businesses. More importantly, we’ll talk about the preventive measures that business owners can take to minimize the risks and repercussions of identity theft.

The Prevalence of Identity Theft

Identity theft is a growing concern for global businesses, and the statistics for 2022 are alarming. According to the 2022 Identity Theft Resource Center's Data Breach Report, there were 1,802 data compromises in the United States. Even small businesses are not spared.

Identity thieves use a variety of methods to steal information, including phishing scams, malware attacks, and the physical theft of devices. The most common method of attack is phishing.

The impact of identity theft on small businesses can be severe. In addition to financial losses, businesses may also face reputational damage, loss of customer trust, and legal consequences. The cost of a single data breach can range from tens of thousands to millions of dollars, depending on the size of the business and the extent of the breach.

The Financial Costs of Identity Theft to Small Businesses

Small businesses are particularly vulnerable to the financial costs of identity theft. In general, we can classify the costs into two categories:

  • Direct financial losses can result from fraudulent charges and fees, lost sales due to downtime, and the cost of repairing or replacing hardware and software.
  • Indirect costs may include lost productivity, legal fees, and the cost of responding to the breach.

The extent of the breach can also impact the financial costs for small businesses. If customer payment information is compromised, the cost may be significantly higher than if only employee information is compromised.

A data breach can also lead to a loss of revenue for small businesses. A breach can damage a business's reputation and lead to a loss of customer trust. This can result in a decline in sales and revenue, particularly if customers decide to take their business elsewhere.

Small businesses may also face indirect costs, such as lost productivity, as employees may need to spend time responding to the breach instead of performing their regular duties.

It's worth noting that insurance coverage can help cover some of the costs associated with a data breach. Cyber liability insurance is a type of insurance that can help cover the costs of responding to a data breach, including the cost of notifying customers and providing credit monitoring services. It can also help cover legal fees and other costs associated with the breach.

Legal Costs of Identity Theft

Small businesses are not only at risk of financial costs but also legal costs associated with identity theft. Small businesses have legal obligations to protect sensitive information, and failure to do so can result in liability for the business. It may be subject to federal and state regulations, as well as lawsuits from customers or employees whose information was compromised in the breach.

It is essential for small businesses to understand their legal obligations and take proactive measures. Failure to do so can result in legal consequences and damage to the business's reputation.

Legal Obligations of Small Businesses

Below are some legal frameworks that necessitate the need for small businesses to have stringent measures against identity theft. The Inability to meet these legal requirements can have consequences.

  • The Federal Trade Commission (FTC) requires businesses to implement reasonable security measures to prevent identity theft and other forms of cyber attacks.
  • The General Data Protection Regulation (GDPR) applies to businesses that operate in the European Union and require businesses to take measures to protect the personal data of EU citizens.
  • State data breach notification laws require businesses to notify customers and employees in the event of a data breach.

Potential Liability for Businesses

Businesses can be held liable for failing to protect sensitive information, resulting in the compromise of customer or employee data.

Businesses can face legal action from customers or employees whose information was compromised in a data breach.

Preventive Measures for Small Businesses

Small businesses can take several steps to protect their data and minimize the risk of identity theft. By implementing strong data security practices and training employees on data protection, businesses can help ensure operational stability while combating potential cybersecurity threats. Below are some of the best things to do:

  • Encrypt sensitive information: Businesses should use state-of-the-art encryption technology to protect sensitive data such as customer payment data, employee social security numbers, and other personally identifiable information.
  • Use strong passwords: Businesses should require employees to use strong passwords and change them frequently.
  • Limit access to sensitive information: Only those employees who need it to perform their job duties must be authorized to access business information.
  • Use firewalls and antivirus software: Firewalls and antivirus software can help protect against malware attacks and other security threats.
  • Use Identity Theft Protection Service: With services like Aura Identity Theft Protection, small business owners can have peace of mind. It offers a 14-day free trial, so you can try it and see whether Aura is good for your business or not. During this period, your business can enjoy a suite of services that can help strengthen cybersecurity.
  • Use secure connections: Employees should use secure connections. This includes using a virtual private network (VPN) to encrypt internet traffic and using secure remote desktop software.
  • Use two-factor authentication: Small businesses should require employees to use two-factor authentication. This adds an extra layer of security and makes it more difficult for hackers to penetrate the business system and steal personal data.
  • Train employees on data protection: Employees should be educated on data protection best practices, such as how to recognize and avoid phishing scams and how to secure sensitive information.
  • Secure hardware and software: Businesses should ensure that hardware and software are up-to-date and secure to prevent vulnerabilities that can be exploited by hackers. It includes work laptops and computers, as well as mobile phones used for business activities.

Having a plan in place for responding to a data breach is also essential. Businesses should have a response team and regularly test their response plan to ensure it is effective. The response plan should include steps for identifying the extent of the breach, notifying customers and employees, and taking steps to prevent future breaches.

The steps mentioned above are often implemented by large businesses. Nonetheless, small businesses are often not as proactive, with many assuming that they are not at risk. It’s crucial to also have a proactive approach to minimize the potentially devastating impacts of identity theft.

Cybersecurity Challenges for Small Businesses

Small businesses face several unique challenges when it comes to cybersecurity. Limited resources, lack of expertise, and reliance on third-party vendors can make it difficult for small businesses to protect their sensitive information adequately. Below is a rundown of the challenges that make it harder for small businesses to combat cybersecurity threats:

  • Limited Resources: Small businesses often have limited resources to dedicate to cybersecurity. They may not have the budget to invest in expensive cybersecurity tools or hire a dedicated cybersecurity team. For many, they would rather dedicate their finances to other things they assume are more relevant.
  • Lack of Expertise: Many small businesses may not have the expertise to implement strong data security practices. They may not know how to identify potential vulnerabilities or how to secure their hardware and software.
  • Third-party Vendors: It’s common for small businesses to rely on third-party vendors for services such as payment processing or website hosting. This can increase the risk of a data breach if the third-party vendor is not secure.

To overcome these challenges, small businesses can consider outsourcing their cybersecurity to a managed security service provider. These providers can offer affordable cybersecurity solutions and expert guidance on data security best practices.

Government Programs for Small Business Cybersecurity

The government recognizes the importance of cybersecurity for small businesses and offers several programs and resources to help them improve their cybersecurity posture. In turn, these programs can be helpful in the prevention of identity theft.

Here are some additional details on government programs and resources for small business cybersecurity:

  • Cybersecurity and Infrastructure Security Agency (CISA): CISA is a federal agency responsible for protecting the country's critical infrastructure from cyber threats. CISA offers resources and guidance on cybersecurity best practices for small businesses, including the Cyber Essentials Toolkit, which provides guidance on implementing basic cybersecurity practices.
  • Small Business Administration (SBA): The SBA is a federal agency that provides support and resources to small businesses. The SBA offers cybersecurity training and resources for small businesses, including the SBA Cybersecurity Certification Program. This program provides free online training on cybersecurity best practices and certification for completing the training.
  • National Institute of Standards and Technology (NIST): NIST is a federal agency that develops standards and guidelines for cybersecurity. NIST offers guidelines and resources for small businesses to implement strong data security practices, including the NIST Cybersecurity Framework, which provides a model for organizations to manage and reduce cybersecurity risk.
  • Federal Communications Commission (FCC): The FCC is a federal agency responsible for regulating communications in the United States. It offers resources and guidance on cybersecurity best practices, including the FCC Small Biz Cyber Planner 2.0, which provides suggestions on developing a cybersecurity plan for small businesses.

Importance of Regular Data Backups for Small Businesses

Data backups are critical for small businesses to minimize the impact of identity theft. By regularly backing up their data, small businesses can quickly restore their systems and recover lost data in the event of a breach. Meaning, it will not disrupt business operations. So, even when disaster strikes, you still have a copy of relevant business data. Here are some reasons why it’s a must:

  • Protect Against Data Loss: Regular data backups can help protect small businesses against data loss due to system failures, cyber-attacks, or other disasters.
  • Minimize Downtime: In the event of a data breach or cyber attack, regular backups can help minimize downtime and quickly restore systems and data. Hence, it will prevent disruptions in business operations.
  • Compliance Requirements: Small businesses may be required by law to maintain backups of sensitive information. For example, HIPAA requires healthcare organizations to maintain backups of patient health information.

How to Implement a Data Backup Strategy

Below are the best things to do for backing up data in a small business.

  • Choose a backup solution that fits the business needs: Small businesses can choose from a variety of backup solutions, including cloud-based backups or physical backups. The backup solution should be tailored to the business's needs, budget, and level of risk.
  • Determine the frequency of backups: It is a must to determine the frequency of backups based on the level of risk and the amount of data they generate. Some businesses may require hourly backups, while others may only need daily or weekly backups.
  • Test backups regularly: Small businesses should regularly test their backups to ensure that they are working correctly and can be used to restore data in the event of a breach. Otherwise, corrective measures must be implemented to remedy what isn’t working.


The impact of identity theft on small businesses can be devastating. It is crucial for small businesses to prioritize data protection and be prepared for incidents to safeguard their financial stability and reputation. By understanding the risks and taking proactive measures to protect their business, small business owners can help mitigate the financial and legal costs of identity theft and ensure their business' long-term success.