For a small business owner applying for an SBA loan, having the right insurance coverage in place is more than recommended — it’s often required. Insurance is a critical component of SBA loan compliance, risk management, and long-term business sustainability.
As a business owner, it’s important to understand what types of insurance may be required and why they matter.
Why Insurance Matters in the SBA Loan Process
SBA loans are designed to support the growth of small businesses while protecting lenders and the SBA from unnecessary risk. Insurance ensures that if a covered event, like a fire, lawsuit, or injury occurs, your business can stay afloat and continue repaying the loan. It’s a safeguard for everyone involved.
Common SBA Insurance Requirements
Here are the most commonly required insurance coverages for SBA loan approval:
1. Property Insurance
Also known as hazard insurance, this is typically required if you’re using commercial real estate or physical assets (like equipment or inventory) as collateral. The policy must cover the replacement cost of the collateral and list the lender as a loss payee.
2. Flood Insurance
If your collateral is located in a FEMA-designated flood zone, flood insurance is mandatory. This ensures the property is protected against natural disasters not typically covered by standard hazard policies.
3. Life Insurance
In many cases — especially for sole proprietors or businesses heavily reliant on a single individual — the SBA may require a life insurance policy equal to the loan amount. The lender must be named as the policy’s assignee.
4. General Liability Insurance
While not always required, this coverage is highly recommended. It protects your business from third-party injury or property damage claims, which could otherwise derail your operations.
5. Workers’ Compensation Insurance
If your business has employees, most states and the SBA will require proof of workers’ comp coverage. This protects both your business and your team.
What You Should Do Next
Before closing on your SBA loan, it’s wise to work with a licensed insurance provider to ensure all required policies are in place and name your lender appropriately. Documenting your coverage early can help you avoid delays in the approval process.