Business Loans

SBA Loan Hazard Insurance Requirements Explained

Mar 08, 2023 • 6 min read
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      Financing your business with an SBA loan can help you invest in the things you need to grow your revenue. However, in addition to your financial documents and business plan, some SBA loans come with insurance requirements. When your loan terms come with collateral obligations, that property also needs to be covered with a hazard insurance policy. 

      Here’s what to know about hazard insurance and when you need it.  

      Hazard Insurance Explained

      Hazard insurance is a type of business property insurance that covers damage caused by accidents or natural disasters. Your insurance policy will outline “covered events.” These are the types of events that may occur and cause damage. When that happens, your hazard insurance kicks in and covers the damage (within the limits of your policy).

      Most hazard insurance policies include the following covered events:

      • Theft
      • Vandalism
      • Fire damage
      • Some water damage (caused by things like burst pipes, but not natural flooding)
      • Storm damage 

      In addition to covering the building itself, hazard insurance also covers the property inside. This includes any damage caused to:

      • Furniture
      • Equipment
      • Inventory
      • Tools

      Limitations Of Hazard Insurance

      Hazard insurance policies don’t give your business an automatic blank check when a covered event occurs. Each policy comes with a coverage limit for both the building and the property within. So it’s important to get a policy large enough to cover a worst-case scenario, such as a total loss.

      Your hazard insurance policy will also come with a deductible—the amount you’re responsible to pay before your coverage kicks in.

      SBA Hazard Insurance Requirements

      The SBA hazard insurance requirement applies to property that is used as collateral. Most SBA loans, including 7(a) and 504 loans, require some type of collateral in order to be approved. 

      Because it’s used as collateral, the property must be properly insured. That way, if there’s any damage done that’s out of your control, the building can be repaired or replaced and still maintain its value.

      Here’s the breakdown on hazard insurance requirements for each type of SBA loan:

      • SBA 7(a) loans – Hazard insurance is required for loans of $25,000 or more.
      • SBA 504 loans – Usually the property being renovated or purchased is used as collateral.
      • Microloans – Hazard insurance is not required, but flood insurance might be.
      • Economic Injury Disaster Loans (EIDL) – Hazard insurance is required for loans of $25,000 or more.

      Types Of Business Property Insurance

      Not all insurance companies refer to property insurance as hazard insurance. Instead, they may call it commercial property insurance. Here are some options to explore as you look for coverage required by the SBA.

      Commercial Property Insurance

      Commercial property insurance is the same thing as hazard insurance. Any covered events provide reimbursement for building repairs, as well as damaged items within the building. With this type of insurance, you would need to file a claim for your business. Then an insurance adjuster would assess the damage and provide you with reimbursement accordingly.

      Flood Insurance

      Anytime your commercial property is located in a flood zone and used as SBA loan collateral, you’ll need a flood insurance policy as well. That’s because damage caused by flooding is not typically included in most hazard or property insurance policies. 

      To see if you need flood insurance, first visit FEMA’s online flood map tool to see if your property’s address is located in a flood zone and then check your need for insurance when you apply for an SBA loan. If you do, you will need to pay an extra premium, but it will be worth the investment, if you’re in an area at risk of flooding. 

      How To Get Business Hazard Insurance For An SBA Loan

      If your commercial property isn’t properly insured, you’ll need to purchase a hazard policy as part of your SBA loan funding process.

      Follow these steps to ensure you’re in compliance with your loan terms:

      1. Choose a licensed insurance agent Even though licensed insurance agents typically receive a commission on your purchase, they are best equipped to help you find the right business coverage for your needs. Specifically seek out one who is experienced in meeting SBA loan requirements. 
      2. Compare policies – With the help of your insurance agent, compare the terms of all of your hazard insurance policy offers. Compare premium costs and coverage to make sure you get the right balance between the two.
      3. Name your lender as the loss payee – It’s standard practice to name the SBA, your lender, or CDC as the loss payee on your hazard insurance policy. They have a vested interest in ensuring the property is repaired or replaced. In some instances, they may monitor how the insurance funds are used.
      4. Maintain your hazard insurance policy – Keep up with your insurance premiums to stay in compliance with your SBA loan terms. You cannot cancel or reduce the insurance policy unless there is some justification that the insured assets have been reduced or depreciated.

      Getting proper hazard insurance is just one step in obtaining an SBA loan. Lendio’s team of experts can help you throughout the entire process. Apply for an SBA loan now!

      Quickly compare financing options from multiple funders.

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      About the author
      Lauren Ward

      Lauren Ward is a personal finance and tech writer with a passion to help consumers make smart financial decisions. Her work has appeared in a variety of publications, including Time and MSN. When she's not writing, she loves gardening and playing board games with her family.

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