Most lenders require a business to have multiple types of business insurance before they’ll give them a business loan, including SBA loans. The insurance policy is a way to protect the lender’s investment. If something happens, like a natural disaster, vandalism, or a lawsuit if someone gets hurt on a job site, the borrower may not have the funds to repay the business loan, putting the lender in a bad position.
The code of federal regulations on this page lists multiple types of business insurance policies required for specific SBA loans, including hazard insurance (for all business loans) and flood insurance for specific situations. Also, the EPA shares in this document that if your business is located in a flood plain, you’ll need flood insurance to qualify for a business loan.
By having the right business insurance policies in place before you apply for your business loan, you won’t have to experience unnecessary delays or immediate application issues.
The Types of Business Insurance Lenders Ask For
Some of the types of business insurance policies that may be required for you to get a small business loan include:
- Disaster—in case something happens to the business and it either cannot operate or needs to relocate.
- Errors and Omissions—to protect against negligence or unsatisfactory services provided.
- Flood—to insure businesses located in flood plains or in locations where floods can damage the business, equipment, building, inventory, or supplies.
- General liability—to cover a business in many different scenarios, including property damage, when advertising negatively impacts another party known as “advertising injuries,” and legal fees.
- Hazard—if assets leveraged as collateral are impacted, including equipment and property being vandalized or stolen.
- Life—in case a personal guarantee is a condition for approval on the business loan so that the lender can collect the money still owed.
- Property—to cover property in case it is damaged and the business cannot operate, or if the property is part of the collateral.
- Vehicle policies—to protect the vehicles, whether they’re used as collateral or for operations.
- Worker’s Compensation—to protect the workers in case of work-related injuries, sickness and, sometimes, lost wages.
Examples of Insurance Policies by the Type of Loan
Each lender will have a different requirement when it comes to business insurance policies, and these may also vary depending on the type of business loan you apply for, where your company operates, the industry you’re in, and niche situations. To help you prepare for your application, here’s a few popular types of small business loans and the policies lenders typically ask for in these situations.
Note: All types of businesses will likely need a general liability policy and workers’ compensation policy if the company has staff.
Dental Practice
Dentists can take dental practice loans to purchase new equipment, open new locations, or cover the cost of renovations when their office is a bit outdated. Because it is in the medical field and dentists treat patients on site, the lender will often need to ensure that the practice is covered against accidents (where patients or staff get hurt), equipment damage, and legal issues (if the practice gets sued).
The lender will be looking for the dental practice to have:
- Dental malpractice insurance to cover lawsuits based on services performed. If money is tied up in a lawsuit, the lender may have concerns about the dentist’s ability to make payments.
- Equipment insurance policies for X-ray machines and other essentials that must be in working condition for the practice to make money. Having them insured builds confidence that the practice will be operational and that the dentist will be able to pay the loan back.
- Property insurance to ensure the practice is covered in case of a fire, vandalism, etc.
Real Estate
Real estate loans can be used for leases, acquiring rental properties, fix-and-flip investing strategies, and buying a large building (if using a commercial real estate business loan). In these cases, lenders will be concerned about the actual land and the building on it.
All real estate businesses will have people on the land, from contractors who make repairs or upgrades to tenants who live in rental units. The lender will want to ensure the real estate company is covered in all aspects.
The types of insurance a lender will look for before giving a real estate loan may include:
- Property insurance to cover vandalism, fires, natural disasters, and other issues that could happen to the land and its structures.
- Errors and Omissions (Professional Liability) insurance policies in case of mistakes in contracts, forgetting to disclose details, oversights, and other potential forms of negligence.
- Business Interruption insurance policies to protect the business during unpredictable situations or lulls. When a slow season hits and money gets tight, the lender will want to make sure the borrower can make payments. Business interruption policies may also be required if it is likely there will be interruptions that stop renovations from happening, if the properties are in flood zones and work will potentially get stopped or interrupted, and in other situations that cause the business to have to temporarily come to a halt.
- Hazard or natural disaster policies in case of flooding, tornadoes, and other disasters that can destroy property, structures, and assets.
Two other types of insurance that a business lender may look for are vehicle insurance, as the owner will need to get to the properties and travel frequently, and commercial property insurance, if the real estate business works with commercial properties.
Working Capital
Working capital loans are more common with small businesses, but companies of all sizes may take them to cover short-term expenses that would otherwise halt operations, like payroll, utilities, or having cash flow while waiting for accounts receivable.
Other times, a working capital loan can be used to stock up on raw materials (for manufacturing companies when prices are good), or for investment opportunities that are time sensitive.
The insurance policies you need for a working capital loan will likely be based on your type of business and the reason why your cash flow is tight. If you’re a manufacturing company and you have inventory that you stock and sell in bulk, commercial property insurance policies may be required in case the inventory or manufacturing equipment gets damaged.
Consulting businesses and industries with employees that travel, like sales teams that meet with customers and marketing teams that display at trade shows, will potentially need to have travel insurance policies in addition to workers’ compensation insurance.
Having business insurance to protect your company in case of emergency situations is a smart idea, not just when you’re applying for a business loan. If you’re in the market for financing or insurance and you have questions about either or are already looking into your options, connect with us today. We gather all the best options from the country’s top providers for your convenience. Simply fill out our online form to get started.
You can also learn more about small business loans here or business insurance here.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
