SBA insurance requirements—the 5 coverages you need to get an SBA loan
Getting an SBA-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 kind of business you run and how much money you need, but here are the most common SBA insurance requirements.
1. Property insurance
Business property insurance
If you’re using your company’s building as collateral for your SBA 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 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.)
(Want more information on these terms? Check out our simple guide to insurance terminology.)
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 prior to the policy’s cancellation. This can be easily accomplished by adding the lender as an "Additional Interest" on the policy. (Huckleberry policies are compatible with SBA requirements, by the way.)
Insurance for Catastrophes (e.g. Earthquake, Flood, Hurricanes)
Whether or not you need to get additional “catastrophe” coverage depends on where you’re located. Some states might not require any additional coverage, but 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 a leased property, your policy should specify that your lender can collect insurance payouts if those improvements are damaged.
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 coverage protects your business if your activities result in injury or damage to others property, or if you’re ever sued by a third party.
Protects you and your business if you make an error, omission, or similar mistake in your work which creates a loss or damage for a client.
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—it’s easy and 100% online.)
3. Workers' Compensation
Workers’ compensation insurance (sometimes called workman’s compensation or, often, just workers’ comp) protects not just your employees, but also protects 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 which satisfies the lender if something happened 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 may be needed 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.
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 need.