Understanding Hazard Insurance for SBA Loans
When applying for an SBA loan, one crucial requirement to be aware of is hazard insurance. This type of business insurance is essential for protecting your business assets and maintaining the value of collateral used for the loan.
What is Hazard Insurance for an SBA Loan?
Hazard insurance, also known as commercial property insurance, is a policy that covers damage to buildings and contents owned or rented by your business. The SBA mandates this insurance for properties used as collateral for SBA loans to ensure that damaged assets can be repaired and their value maintained.
Most insurance companies don’t sell a policy explicitly called “business hazard insurance.” Instead, you should look for commercial property insurance, which covers buildings, contents, and lost business income during repairs.
When is Hazard Insurance Required for an SBA Loan?
The requirement for hazard insurance varies by SBA loan type:
- SBA 7(a) loans: Hazard insurance is required for all assets pledged as collateral on loans greater than $50,000.
- SBA Express and Export Express loans: Lenders don’t have to require hazard insurance, but they must document the reason if they don’t.
- SBA 504 loans: Hazard insurance is required for projects over $50,000 on all assets used as collateral.
- SBA disaster loans: For Economic Injury Disaster Loans over $50,000 that require collateral, hazard insurance is mandatory.
Additional SBA Flood Insurance Requirements
If your collateralized property is in a flood hazard area, you’ll need a separate flood insurance policy. This requirement extends to personal property (like equipment or inventory) used as collateral if it’s located in a building within a flood hazard area that is also being used as collateral.
The flood insurance coverage must be at least equal to the outstanding loan balance or the maximum coverage limit under the National Flood Insurance Act of 1968, whichever is less.
Where to Get Hazard Insurance for an SBA Loan
You can obtain hazard insurance from most business insurance providers. Here are some top choices:
- Next Insurance: Best for quick commercial property insurance purchases online.
- Chubb Small-Business Insurance: Ideal for entrepreneurs needing a comprehensive business owner’s policy.
- Nationwide: Suitable for businesses requiring flood insurance alongside property coverage.
- State Farm: Best for those who prefer working with an insurance agent in person.
To find the best coverage at competitive prices, it’s advisable to get multiple quotes. Services like NerdWallet Small Business can help you compare quotes from over 30 insurers and access your Certificate of Insurance instantly through Coverdash.
By understanding and securing the right hazard insurance, you can protect your business assets and comply with SBA loan requirements effectively.
