As a small business owner seeking Small Business Administration (SBA) loans, you might encounter some unfamiliar terms during the application process. Among these terms is “loss payee endorsement,” an important provision for your loan.
What is a loss payee endorsement?
A loss payee is an entity that receives compensation from an insurance company when a claim is approved. A loss payee endorsement, also sometimes known as a loss payee clause, requires you to grant a lender the right to loss reimbursement for any items you put up as collateral. Many SBA loans require you to sign this endorsement or a somewhat different clause known as a lender’s loss payable endorsement.
Why must you sign a loss payee endorsement when acquiring SBA loans?
When you sign a loss payee endorsement, you grant your lender extra protection if you can’t pay back your loan. A loss payee endorsement gives your lender the right to payment in the event of a covered loss on the property, and this payment route minimizes your lender’s risk. With lower risk, your lender may be more likely to approve your loan.
The differences between loss payee and lender’s loss payable endorsements
As you learn more about loss payee endorsements and fill out SBA loan applications, you may also come upon the term “lender’s loss payable endorsements.” While the two are similar and both protect lenders in the case of unpaid loans, they’re not quite the same.
A lender’s loss payable endorsement contains all the provisions of a loss payee endorsement, but with one major difference. With a lender’s loss payable endorsement, if the insurance policy on your collateral becomes invalid, then although you are no longer covered, the lender remains covered. If you sign a lender’s loss payable endorsement and you’ve offered property as collateral, then if your insurance lapses and your property is damaged, only your lender, not you, is reimbursed.
Four options for loss payable provisions endorsement
1. Loss payee clause
As mentioned earlier, in a loss payee endorsement, your lender receives compensation when your insurance policy reimburses you for losses. If you sign a loss payee clause, your lender loses their protections on your collateral if your insurance policy lapses.
2. Lender's loss payable clause
As mentioned earlier, in a loss payee endorsement, your lender is reimbursed alongside you for any damages to your collateral. Unlike a loss payee clause, the provisions of a lender’s loss payable clause remain valid even if your insurance policy lapses.
3. Building owner's loss payable clause
A building owner’s loss payable clause tends to pertain more to landlord-tenant arrangements, but SBA lenders may demand it as well. In this arrangement, if a building that you put up as collateral is damaged, then the lender will be reimbursed for the damaged as well.
4. Contract of sale clause
If you’re taking out an SBA loan to complete the sale of a property, you might sign a contract of sale clause. Under this type of lender’s loss payable endorsement, your insurance policy will reimburse both you and the SBA lender for any losses to the property.
Why is a lender’s loss payable important for SBA loan applications?
If you’re putting up real estate, personal property, machinery, equipment, furniture, fixtures, or inventory as collateral for your SBA loan, then lender’s loss payable endorsements are of paramount importance. That’s because the SBA requires any applicants putting up these types of items as collateral to insure these items and include a lender’s loss payable endorsement in the insurance policy. The SBA may not require a lender’s loss payable clause if your collateral is a building or land – in that case, a simpler loss payee endorsement may suffice.
Do I have to add a lender’s loss payable endorsement to my SBA loan agreement?
Although lender’s loss payable endorsements are crucial for SBA loans, you won’t have to add them to your collateral insurance policy until after you apply. Once your lender gives initial approval for your loan, you’ll then need to add a lender’s loss payable endorsement to your insurance policy. You should do so before your lender gives final approval for your loan.
To add the appropriate clause to your insurance policy, contact your insurance provider and submit your endorsement request. Note that most standard insurance policies include clauses designating the named insured as the only payee, so without contacting your insurer first, your policy is unlikely to include the needed endorsement.
Upon your insurer adding the required endorsement to your policy, you should request a new certificate of insurance. Then, you should share this document with your lender to certify that you’ve appropriately endorsed your insurance policy. From there, you should be well on your way toward final approval for your SBA loan.
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