Insurance Required to Obtain an SBA Loan

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.

However, some business owners are wary. SBA loans have the reputation of being time intensive and requiring an unusually large amount of paperwork. Not anymore. 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.

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

Following are types of insurance generally required when you’re seeking an SBA loan.


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 in exchange for mandatory relinquishment of the employee’s right to sue for negligence. In order to obtain an SBA loan, small business owners must be in full compliance with state requirements.


Flood 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. 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.


Other Possible Insurance Requirements

Depending on the nature of your business and the perceived risk to the Lender, additional insurance might be required. Here’s a list that may apply to your business:

  • Liability Insurance
  • Product Liability Insurance
  • Dram Shop/Host Liquor Liability Insurance
  • Malpractice Insurance
  • Disability Insurance
  • Workers’ Compensation Insurance
  • State specific insurance requirements


In Conclusion

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.

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