SBA insurance requirements: The 5 coverages you need to get an SBA loan

Getting a U.S. Small Business Administration-secured loan is one of the most common ways to grow your small business, but there’s a catch: Your business needs to be insured.

And there’s a good reason for that. Insurance policies protect your business, which means they effectively protect anyone who gives your business a loan. No lender wants to lose their money because you had to fight a surprise liability lawsuit.

So, which insurance coverages will you need to get an SBA loan? Requirements change based on what type of business you run and how much money you need, but here are the most common SBA loan requirements when it comes to your insurance.

1. Property insurance

Business property insurance

If you’re using your company’s building as collateral for your small business loan, you’ll need to insure it with building property protection. You’re also required to get business personal property insurance for any furniture, fixtures, and equipment that you’re using as collateral.

Here are the details:

The coverage must be for the full replacement cost of your property, if that’s available to you. If you can’t buy a full replacement policy, you’ll need to insure everything for the maximum insurable value.

For commercial real estate collateral, you’ll need to name your SBA lender as the mortgagee. For business personal property collateral, you’ll make the SBA lender your loss payee. Then, if something happens, your SBA lender will be able to step in and claim payments on your behalf.

One final thing to check: For your coverage to be eligible for an SBA loan, your policy needs to state “that any action or failure to act by the borrower or owner of the insured property will not invalidate the interest of the lender or the SBA.” The policy also needs to specify that it will notify the lender at least 10 days before the policy’s cancellation. You can easily accomplish this by adding the lender as an "Additional Interest" on the policy. (Huckleberry policies are compatible with SBA requirements, by the way.)

Insurance for catastrophes (earthquake, flood, hurricane)

Whether or not you need to get additional “catastrophe” coverage depends on where you’re located. Some states might not require any additional coverage. Still, if you’re in a place that’s highly susceptible to certain kinds of calamitous weather, the SBA might require you to get a hazard policy that covers losses from things like wind, hail, or earthquakes.

An important note: If you’re getting an SBA loan to finance new construction or to make improvements on leased property, your policy should specify that your lender can collect insurance payouts if those improvements are damaged. You may also want to consider a disaster loan.

2. Liability insurance

Liability coverages protect your business if your activities result in injury or damage to others’ property or if you’re ever sued by a third party, which is why SBA lenders require proof of liability insurance before they’ll sign off on a loan.

Which liability insurances will you need? That depends on your business and location. So let’s quickly go over the most common kinds of liability coverage your SBA lender might ask for:

• General liability insurance: General liability coverage protects your business if your activities result in injury or damage to others’ property or if a third party ever sues you.
• Professional liability insurance: Protects you and your business if you make an error, omission, or similar mistake in your work that creates a loss or damage for a client.
• Liquor liability insurance: Protects you from the costs associated with injury or property damage caused by an intoxicated person who was served or sold liquor by your business.
• Product liability insurance: Protects your business if one of your products ever causes damage or personal injury and may cover expenses of recovery in situations where a product needs to be recalled.

As you might expect, your SBA lender needs to be listed as an additional insured on any required liability coverage. (The other thing to know? You can get liability coverage in about 5 minutes with Huckleberry—it’s easy and 100% online.)

3. Workers’ compensation

Workers’ compensation insurance (sometimes called workman’s compensation insurance or, often, just workers’ comp) protects not just your employees but also your business from financial losses if one of your workers ever gets sick or injured on the job. Put simply: Workers’ comp pays medical bills, wage replacement, and ongoing disability support.

Because it’s such important protection—and because it’s required just about everywhere—workers’ comp is necessary for an SBA loan if your business has employees.

4. Life insurance

In certain circumstances, an SBA lender may require you to have a life insurance policy. Typically, this is where the collateral doesn’t fully secure a loan, and your business can’t run without you. (And, of course, that life insurance policy will need to be in an amount that satisfies the lender if something happens to you.)

This requirement generally counts for any crucial co-owners/principals your business depends on, too.

When you get those policies, you’ll designate the SBA lender as the assignee (not the beneficiary).

5. Additional types of insurance

Depending on the kind of business you run and the type of loan you’re getting, you might be asked for proof of one of these two specialty coverages:

• Builders risk: Protects structures and materials during new construction projects or renovations, which you may need for a construction loan.
• Equipment floater: Protects equipment or tools that aren’t generally in a single location, such as construction or landscaping tools, unlike traditional business property insurance.

Frequently asked SBA loan requirement questions

Who qualifies for an SBA loan?

Your business must meet several requirements to qualify for an SBA loan. SBA loan requirements can be broken down into the following categories:

• Business operations: Your company must be a legally registered, for-profit business that conducts business in an “eligible” industry. Businesses that do not meet eligibility requirements include nonprofits, churches and religious organizations, and gambling or lending services entities.
• Business size: Your company must meet the definition of a “small business” as defined by the SBA to be considered a qualifying business for any of the SBA term loans. The definition of “small business” varies by industry based on the number of employees you have or the annual revenue of your business. An interactive tool on the SBA website will help you determine whether or not you meet this SBA loan requirement.
• Business character: Your company cannot be late or overdue on any outstanding government debt, and no one in your company who controls 20% or more ownership can be incarcerated, on parole, on probation, or be a defendant in a criminal proceeding.
• Investment: As the owner of your company, you must have previously invested time and/or money into your business.
• Location: Your company must be located and doing business within the United States and its territories or proposing to conduct business within the United States and its territories.
• Business financing: Before hitting up the SBA for a loan, you must prove you tried alternative forms of funding and financing options, tried obtaining a line of credit, demonstrate a need for the loan, and provide “sound business purpose” that outlines how you plan to use the funds.

For the latest on getting SBA financing, you must review the SBA loan requirements on the SBA website before deciding to move forward with a short-term or long-term application.

What disqualifies you from getting an SBA loan?

There are several different SBA loan requirements, but there are also several ways to be disqualified from an SBA loan. Reasons for SBA loan disqualification include:

• You do not meet the SBA credit score requirements: Generally speaking, if you have a low net worth and your personal credit score is below 630, you will not meet the SBA credit score and credit history requirements. Most lenders are looking for an excellent credit score of 720 and above, so it’s also advised you have good business credit and little to no business debt or credit card debt.
• You do not meet the SBA down payment requirements: Most lenders require you to meet SBA loan collateral requirements in the form of a down payment or another asset, such as property, real estate, or equipment. If you do not have collateral or the working capital for a down payment, you’re most likely going to be disqualified from obtaining an SBA loan.
• You have a lengthy criminal record: A solitary misdemeanor or felony will not necessarily disqualify you from receiving an SBA loan, but multiple criminal offenses most certainly will.
• You’ve defaulted on a government loan: Simply put, you will not qualify for an SBA loan if you owe the government money.

Again, the latest qualifications and disqualifications for obtaining an SBA loan can be viewed on the SBA website, sba.gov.

Can anyone get an SBA loan?

Any United States small business owner, startup, existing business, or entrepreneur can submit an SBA loan application, provided the business they are running is within the United States or its territories and provided they meet the rest of the SBA loan requirements.

What is the maximum amount you can borrow from an SBA loan?

The maximum loan amount you can borrow from an SBA loan, provided you meet the SBA 7 loan requirements, is $5 million. There is a different maximum loan amount depending on which loan option you’re applying for, but $5 million is the highest.

How much does an SBA loan cost?

The cost of an SBA loan depends on the type of SBA loan you’re applying for, the loan amount you’re borrowing, your SBA guarantee fee, and how you went about securing your SBA loan. The following factors influence how much your SBA loan will cost:

• SBA loan packaging fee: A fee charged to organize your application documents.
• SBA loan broker fee: The fee a broker may charge you for helping to facilitate your loan. The charge is included in your packaging fee.
• SBA loan service fee: The fee your SBA lender may charge you to manage your loan. The repayment terms typically include interest rates or fees that range from 0.25% to 0.75% of the remaining loan balance each billing cycle.
• SBA loan closing costs: Miscellaneous costs lumped together that include business valuations, appraisal fees, attorney fees, title costs, etc.
• SBA loan late-payment fee: Fees for making a late payment on your SBA loan.
• SBA loan prepayment fee: The prepayment penalty for paying off a long-term SBA loan early.

What are the requirements for an SBA loan?

When applying for an SBA loan program, you’ll be asked to submit a variety of paperwork. Here are the most common documents you’ll be asked to provide throughout the application process:

• Income tax returns
• Business lease
• Borrower Information Form, SBA Form 1919
• Statement of Personal History, SBA Form 912
• SBA Form 413, personal financial statement
• SBA Form 148
• Business history and overview
• Business plan
• Business owner resumes
• Loan application history
• Your business licenses and certificates
• An outline of your collateral
• Income statements, balance sheets, cash flow projections, and other financial statements

SBA loan proceeds can only be used for your business. For more details on the SBA loan requirements, be sure to check out the SBA website.

Secure insurance for your business with Huckleberry

Still have more questions about which coverages you need? Give Huckleberry a call. We have great advisors on standby who can help.

In the meantime, why not get a workers' comp insurance rate estimate? It’s free, 100% online, and it could save you up to 32% on the coverages you’re looking for.

Check out Huckleberry today for all of your small business insurance needs.