loan

Are you planning to apply for a loan from the Small Business Administration (SBA) in the near future? Did you know that you’re required to hold certain insurance policies in order to be approved?

The SBA is eager to help businesses and entrepreneurs get loans provided they meet specific qualifications. Depending on your lender and your industry, you could be expected to carry a variety of policies like hazard insurance, personal property liability, and even life insurance for your SBA loan.

Insurance requirements apply to business owners whether they work out of an office or work from home. If you’re not prepared, getting approved will take longer than expected.

Life insurance is required for loans that aren’t fully secured

This may come as a surprise, but unsecured SBA loans require businesses with a single owner to carry life insurance. For example, sole proprietors, single member LLCs must carry a life insurance policy that matches the size and term of their SBA loan.

Before you rush out to get a life insurance policy, think about it from two different perspectives. First, you need a policy that will satisfy SBA requirements. Second, you should choose a policy that also supports you.

Whole life vs. guaranteed universal life insurance

If you’ve never purchased life insurance before, you’ll need to know the difference between universal and term life insurance. Universal life insurance will cover you for the rest of your life, but offers a fixed premium. Term life insurance is good only for a certain period of time. Your policy should support your needs first and meet SBA requirements second.

Never buy a life insurance policy just because it meets the SBA’s requirements. Always consider how a policy will benefit your loved ones before making the commitment.

Additional insurance policies you might be required to carry

Depending on your industry, you could be required to carry certain types of hazard insurance for natural disasters. For example, if any of your collateral is located in a building in a flood hazard area, lenders will require you to get flood insurance. Sometimes there are exceptions, like if buying flood insurance isn’t economically feasible or unavailable. However, if flood insurance is required, the policy must contain a lender’s loss payable clause.

Another common type of insurance commonly required is earthquake insurance. When a business is located in a state that requires earthquake coverage as part of a hazard insurance policy, you’ll be required to obtain a separate earthquake insurance policy.

Additional insurance policies you may be required to carry include personal property insurance, marine insurance, and real estate insurance. Of course, all required insurance policies must contain a lender’s loss payable clause.

What is a lender’s loss payable clause?

If you’ve never obtained an SBA loan, you might not be familiar with this type of clause. A lender’s loss payable clause makes your creditor the payee of the insurance policy.

This clause gives the loss payee (your lender) the right to receive loss payments even when the insurance company denies a claim under certain circumstances. For example, say you’re using a car as collateral, the car gets damaged, and you file a claim with your property insurance company.

Now, say your claim is denied because you failed to pay your premium. Your lender is still entitled to receive loss payments. However, your lender must first pay your outstanding premiums and notify the insurance company that ownership of the car has changed.

Overall SBA loan requirements are tedious

Insurance policies are only part of the SBA’s tedious requirements. For example, at the very least, you’ll need excellent personal credit, strong business income, and adequate collateral.

Since the SBA works with various lenders, you’ll have to meet your lender’s requirements along with the requirements for your specific loan program. These requirements are strict. For example, you have to prove that other financing options aren’t available to you and your net worth cannot exceed $15 million or $5 million in net annual income.

You’ll also be required to show how you’ve invested your own time and/or money into your business. The SBA wants to know you’re committed to building a successful business. Success isn’t guaranteed, of course, but someone who invests time and money into starting a business is more likely to achieve success.

Is an SBA loan right for you?

While SBA loans are popular, you might benefit more from a traditional loan. If you need funding and you’re not sure where to start, get advice from a professional before submitting your application. Applying for a loan can be a long process. Make sure you apply for the right loan from the start.

Jenna Cyprus is a freelance writer from Renton, WA who is particularly interested in travel, nature, and parenting. Follow her on Twitter.

SBA Loan stock photo by karen roach/Shutterstock