Do you need funding for your small business?
The Small Business Administration loan is known as the standard loan for entrepreneurs who are looking for extra funding to grow or improve their business. SBA loans are known to have some of the lowest rates in the market and a 10-year term, which is great as the payments are low and easy to manage.
However, there are requirements you must be able to meet to qualify for these loans. One of the most important requirements is insurance, as the lender must ensure appropriate insurance to protect the collateral that is being used for the loan. The following are common insurance requirements when you are applying for an SBA loan:
1. Personal Property Insurance
If the SBA is secured by personal property, proof of personal property insurance is required. The personal property insurance policy must:
- Have coverage in the amount of the full replacement cost.
- If the full replacement cost is not available, the coverage must be for the maximum insurable value.
- Contain a “lender’s loss payable clause” in favor of the lender and provide that any action or failure to act by the borrower or owner of the insured personal property will not invalidate the interest of the lender/SBA.
- Provide at least 10 days prior written notice to lender of policy creation
Source: SBA SOP 50 10 5(K)
2. Life Insurance
According to the SBA, if the loan is not fully secured, life insurance is a requirement for entrepreneurs that have their businesses registered and classified as sole proprietorships, single member LLCs or otherwise dependent on one owner’s active participation. Lenders may factor in the available collateral in determining the appropriate amount of life insurance required.
As a rule, the proceeds from the assignment of a life insurance policy should be applied to the principal balance of the loan. In the case the insured dies, all or part of the life insurance proceeds will be released, as long as the death of the owner has no significant impact on the management of the business and;
- The proceeds are needed to prevent financial hardship;
- The proceeds are needed for a valid business purpose;
- Based on the strength of the business, there is no reason to believe the loan will not be repaid in full.
Source: SBA SOP 50 57 2 and SBA SOP 50 55
3. Flood Insurance
When applying for an SBA loan, collateral is required. To define, collateral is property or assets that a borrower offers in order to secure a loan. In the case that FEMA (Federal Emergency Management Agency) indicates that a part of the loan collateral is or found out to be on a flood hazard zone, you will need to get the necessary hazard insurance. Borrowers that do not maintain the required flood insurance for the term of the loan, will become ineligible for future SBA loans.
4. Hazard Insurance
In a nutshell, hazard insurance covers physical damage to your home or business and its contents caused by covered perils or “hazards”. If the borrower’s business is located in a state that requires additional coverage (such as wind, earthquake or hail) the borrower must provide a separate policy.
In general, lenders and Certified Development Companies (CDCs) are required to make sure that all collateral with a recoverable value is adequately insured to protect the ability to recover the SBA loan.
5. Other Possible Insurance Requirements
Depending on the nature of your business and the assessed risk to the lender, additional insurance policies might be required. Here are some that may apply:
- Liability Insurance
- Product Liability Insurance
- Malpractice Insurance
- Disability Insurance
- Workers’ Comp
- And other state specific insurance requirements
What is the Consequence of Not Ensuring My Collateral?
From SBA, the failure to ensure the proper and adequate insurance coverage may lead to a “Repair” on loans. A repair is “an agreement between SBA and a lender to a specific dollar amount to be deducted from the funds SBA pays on the lender’s guaranty in order to fully compensate SBA for an actual or anticipated loss caused by the lender’s actions or omissions.”
It is important to have everything ready before you apply for an SBA loan. Check with your lender long before you start the loan application process in order to know if you would need additional insurance.
Do you have other questions? Inszone Insurance is here to help. Contact us now!
Chris Tracy
