Why Lenders Ask for Insurance

Jan 12, 2023

When you apply for a business loan, you are also asking a lender to trust that your business and its revenue will be able to pay the loan back in full. Part of that assurance—is business insurance. It isn’t pleasant to think about all the things that can go wrong, and the idea of insurance paperwork is daunting, but it’s essential work for responsible small business owners who have employees and customers relying on them.

Why do lenders want you to have insurance?

When you buy a house, the mortgage company requires proof of homeowners insurance. This makes sure that, if the worst were to happen and damage were to affect the value of your home, you would still have the funds to pay your mortgage.

For businesses, the reasoning is similar. If something were to happen to you, the business owner, or the business’s assets, like commercial real estate or business equipment that brings in revenue, there’s still a resource to pay your small business loan. 

For the small business lender, the number one thing that keeps them in business is customers who pay them back, so insurance is an important part of a small business loan or SBA loan application.

What kind of insurance do you need for a Small Business Loan?

Every loan is different, and the type and amount of business insurance you may need can vary. This is a list of the most common types of insurance you may be asked for, and why.

General Liability – Protects you, the small business owner, from financial losses that can come from lawsuits. Disgruntled employees, injuries, and data breaches are common reasons why a business may get sued. 

Life Insurance – As the owner of the small business, the business’ long-term success relies on you, especially in the growth years. Having personal life insurance protects the business’s financial obligations.

Workers’ Compensation Insurance – Pays a percentage of an employee’s salary if they are injured while performing their duties

Other types of insurance offer more specific protection and are based largely on the business’s property and physical location. Because major changes in a small business owner’s personal finances can affect their ability to repay their loan, some lenders ask for both commercial and personal policies. 

These insurances protect property from damage or destruction including fire, theft, vandalism, or water from burst pipes. They do not protect from floods or earthquakes.

  • Business Personal Property – This protects assets like equipment, inventory, furniture and computers 

  • Builder’s Risk/Course of Construction Insurance – Insures building and construction material against damage while construction or leasehold improvements are taking place

  • Commercial or Residential Real Estate Hazard – Protects your commercial building or residential property and its contents

  • Condominium External and Internal Coverage – These insurance policies protect the owner’s condominium, both outside and inside

  • Vehicle Insurance – Protects vehicles owned by the business or the business owner from unforeseen accidents

  • Flood Insurance – May be requested for commercial or residential structures, because most property-based policies do not cover damage due to floods.

When a business relies on a specific person’s professional skills and knowledge, like medical practices, long-term change in that person’s health can affect the business. Professional / Disability insurance protects a professional individual whose business relies on their profession, like a doctor, in case of a disabling medical condition.

Remember, small business loans don’t require ALL of these insurances, but you should be prepared to acquire a policy you may not have as part of the loan application process.