November 8, 2021 By Suzanne Robertson

Are you a small business owner in need of funding? A Small Business Administration (SBA) loan is known as the “gold standard” for entrepreneurs who want to consolidate debt, buy equipment, purchase real estate, increase marketing, hire new employees, and more. SBA loans have some of the lowest rates in the marketplace and a 10-year term, which means payments are very low.

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SBA loans have the reputation of being time intensive and requiring a lot of paperwork. However, SmartBiz Loans® with its marketplace of preferred SBA lending banks, has streamlined the process. If you’ve been in business 2+ years, have a healthy cash flow and strong credit, an SBA loan might be your best funding solution.

Of course, as with any loan, there are requirements to meet to qualify. One of those important requirements is insurance. There are a variety of policies that you need to have in place during the life of your loan. In addition to insurance requirement to qualify for a loan, the right type of insurance can mean the difference between success and the possibility of losing your business.

Here’s what you need to know about the types of insurance generally required when you’re seeking an SBA loan:

What is business insurance?

In short, business insurance is a contract between the insurance company and the business. The insurance company agrees to provide financial protection in the event of a specified loss in exchange for premium payments. At the time of a loss, the business will file a claim.

Why does a business need insurance?

Business insurance may help protect business owners and independent professionals against everyday risks, such as mistakes, stock or premises damage, and legal costs. Some policies may even protect against business interruption and supply chain breakdown.

What is the penalty for not having business insurance?

There are not only penalties for operating a business without insurance, but the penalties generally also come with a costly fine. The total fines for not having insurance depends on where you live, as penalties and fines vary from state to state.

Types of business insurance typically required for an SBA loan

Below are some types of business insurance you may be required to carry. However, each business is unique so be sure to check with a small business insurance professional to assess your business’s needs. The following policies may be required by an SBA lender:

Workers’ Compensation Insurance

If you have employees, workers' compensation is usually required. This type of insurance provides wage replacement and medical benefits to employees injured in the course of employment. To obtain an SBA loan, small business owners must be in full compliance with state requirements.

Hazard insurance

When you apply for an SBA loan, collateral is required. Collateral is property or other assets that a borrower offers to secure the loan. As a condition to qualify for an SBA loan, the SBA requires borrowers to maintain hazard insurance on all pledged collateral. If the borrower’s business is located in a state that requires additional coverage, such as wind, hail, or earthquake, the borrower must provide a separate policy.

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Flood Insurance

If FEMA (the Federal Emergency Management Agency) indicates that any part of the loan collateral is or will be located in a special flood hazard zone, you'll need to secure appropriate hazard insurance. Borrowers who don’t maintain required flood insurance for the term of the loan are ineligible for future SBA assistance. The only exception is when flood insurance required for personal property collateral can’t be obtained or is prohibitively expensive.

Real estate insurance

For real estate insurance, coverage must be in the amount of the full replacement cost. If full replacement cost insurance isn’t available, the policy must be for the maximum insurable value.

Life insurance

According to the SBA, if the loan is not fully secured, life insurance is required for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation, consistent with the size and term of the loan.

Liquor liability insurance

Any business that sells alcohol, regardless of size, is exposed to liquor liability and could benefit from purchasing insurance.

Professional liability insurance

Professional liability insurance (PLI) is insurance that protects professionals such as accountants, lawyers, and physicians against negligence and other claims initiated by their clients. Professionals who have expertise in a specific area require this type of insurance because general liability insurance policies do not offer protection against claims arising out of business or professional practices such as negligence, malpractice, or misrepresentation.

Best practices to get business insurance

Here are four suggestion’s to consider before purchasing business insurance:

Assess your risks

Think about what kind of accidents, natural disasters, or lawsuits could damage your business. If you need help, the National Federation of Independent Businesses (NFIB) provides information for choosing insurance to help you assess your risks and to make sure you've insured every aspect of your business.

Find a reputable licensed agent

Commercial insurance agents can help you find policies that match your business needs. Keep in mind that they receive commissions from insurance companies when they sell policies, so it's important to find a licensed agent that’s interested in your needs as much as his or her own.

Shop around

Prices and benefits can vary significantly. You should compare rates, terms, and benefits for insurance offers from several different agents.

Re-assess annually

As your business grows, so do your liabilities. If you have purchased or replaced equipment or expanded operations, you should contact your insurance agent to discuss changes in your business and how they affect your coverage.

Final thoughts

It’s a smart strategy to have your ducks in a row before you apply for an SBA loan. Check with your lender before you start the application process to determine if you need to get additional insurance. Visit the SmartBiz Loans® Small Business Blog for articles to help you prepare for the loan process:

  • How to Qualify for an SBA Loan in 2021
    This article takes a deep dive into the requirement to apply for an SBA loan and an outline of the application process works.
  • SBA 7(a) Checklist
    We’ve compiled a comprehensive checklist you can follow to help expedite the SBA 7(a) loan process.


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