Hazard insurance for SBA loan? Did you know that small business emergency loans require you to have SBA EIDL hazard insurance to comply with the loan policy?
But what is hazard insurance? Do you already have sufficient coverage? And if you don’t, what kind of policy should you have?
What is an SBA Loan?
A Small Business Administration (SBA) loan is a small business loan that is covered up to 80% by the SBA. In some cases, such as the EIDL program, it goes directly through the SBA. These are the most common types of SBA loans:
The current SBA Economic Injury Disaster Loan (EIDL) program, which closed to new applications in December 2021, offers loans of up to $2 million at an interest rate of 3.75% (2.75% for nonprofits). profit) with a maturity of 30 years.
SBA 7(a) Loan Program.
The 7(a) program is the most common type of SBA loan and is offered through SBA-approved lenders. The maximum loan that businesses can qualify for is $5 million. The SBA underwrites 85% of your loan up to $150,000 and underwrites 75% of your loan above $150,000.
SBA 504 Loan
504 Loans are offered through nonprofit partners of the SBA called Certified Development Companies (CDCs). 40% of the loan will be funded through CDC (which is backed by the SBA), 50% will be funded by another credit institution and the borrower will need to cover 10% in cash or working capital. The company must create a job for every $65,000 borrowed.
For micro-loans (up to $50,000), the SBA provides funding to financial intermediaries, such as community development financial institutions (CDFIs) and other community nonprofit organizations. These intermediaries then offer microloans to companies.
Do SBA Loans Require Hazard Insurance?
Yes, when you apply for an SBA loan, you will be asked to provide proof of hazard insurance. The SBA, like all other lenders, wants to prove that your business and assets are protected. In some cases, you have up to 12 months to purchase hazard insurance, but many lenders that work with the SBA will want to see proof of insurance upfront.
What is hazard insurance?
Hazard insurance is coverage that protects your home or business from structural damage and covers the cost of replacing or repairing the personal property, tools, equipment, furniture, and inventory.
There are several types of home and business insurance that can meet the SBA’s requirements for hazard insurance. If you own and work in your home, homeowners insurance should cover the requirements. If you do not own the property where you work, renters insurance may be sufficient. In any case, whether you work from home or not, the insurance policy must cover your business to be approved by the SBA.
Business property insurance is considered hazard insurance. In some states, personal property insurance is not considered hazard insurance, so check what the rules are in your state.
Speaking of the SBA and its many loans, most require hazard insurance. But one of the main differences between the EIDL and PPP programs is that EIDL requires hazard insurance while the Paycheck Protection program does not.
What Hazard Insurance For SBA Loan Cover?
Hazard insurance and any insurance policy that falls under the hazard insurance category cover damage from natural disasters such as hail, fire, and water damage.
Let’s say there’s a hurricane in your area and all your computers have been washed away. Your hazard insurance covers the cost of repair or replacement, so you can get back to work.
Here are some common examples of hazards that may be covered by hazard insurance:
- Theft. When someone steals business assets that you own, hazard insurance can cover the replacement cost.
- Vandalism. If your business property is destroyed, your hazard insurance will cover the costs of cleaning, repairing, or replacing the damaged items.
- Fire damage. Hazard insurance covers the cost of replacing or repairing the fire-damaged property. This may or may not be standard, so ask about this coverage.
- Water damage. In general, most policies cover accidental water damage such as a broken pipe, leaking water heater, overflowing sink, washing machine malfunction, etc.
- Storm damage. Depending on the fine print of your policy, your coverage may also include damage from natural disasters such as floods, hurricanes, electrical storms, and earthquakes. Every policy is different, so make sure you know what yours does and doesn’t cover.
Is hazard insurance required for EIDL loans?
You need hazard insurance for EIDL loans.
In some states, including California, if you live in a special flood hazard area, you may also need to purchase and maintain flood insurance for the full insurable value of your business property for as long as you have the loan.
Because it is necessary?
EIDL’s loan hazard insurance requirements are there to protect you and the SBA’s investment in your business.
Essentially, it is in the best interest of the SBA and your business that your business is covered in the event of any issues that prevent you from functioning. When you can get back to work, you can generate income again… and pay off your loan.
How Does Hazard Insurance Work?
Hazard insurance works just like any other home insurance policy. You pay your monthly premium based on your assets and property and how much coverage you want.
If something were to happen, say a fire that destroyed everything in your business, you would file a claim with your insurance company. The adjuster would come to your property to assess the damage and determine how much the company would give you for the loss. Once you receive that money, you can repair or replace what was damaged or lost.
SBA EIDL Hazard Insurance Restrictions
Some of the EIDL usage restrictions include hazard insurance. Here are a few scenarios to consider.
If you run your business from home, how do you get hazard insurance? Homeowner policies cover some of what you need, but you may also need other policies specific to business equipment and assets, such as a business owner policy. This provides liability coverage and property protection for your business equipment. Another option is a business home insurance policy, which supplements your existing homeowner’s policy that covers business equipment and liability.
Do not own the property
If you do not own the property where your business operates, be it a home business or commercial property, you will need renters insurance to qualify as hazard insurance. Make sure the business is on the policy if it is a home business.
Application for a hazard insurance
If you’ve been told you need SBA EIDL hazard insurance and you don’t have a qualifying policy as listed above, you’ll need to get quotes from some commercial insurance companies.
You will be asked questions about your company, such as whether it is work from home, how many employees you have, and what industry you are in. You need to select the type of coverage you want. Some insurers lower the rate if you bundle different policies.
You will receive a rate based on the information provided. It can be smart to look for quotes from more than one insurance company to find the best rate.
Cost of hazard insurance
The amount you pay for your SBA EIDL hazard insurance depends on several factors, including:
- The industry you are in
- The value of your assets
- What kind of property do you have?
- How many employees do you have?
- How many insurance claims you have made in the past
The best way to save money on your policy is to bundle multiple insurance policies with one company, which gives you a discount. Plus, you can save more by paying your entire annual policy in one go instead of rolling it out monthly.
More details about EIDL
Now that you know more about the SBA EIDL Hazard Insurance, you can learn more about the EIDL Loan Program. We have many articles to answer your questions. Find out if EIDL loans can be forgiven and how to calculate an EIDL loan amount to see how much you qualify for.
How much hazard coverage do you need?
The exact requirements of hazard insurance for sba loan will vary as some lenders may also have their own stipulations, but the SBA requires 80% coverage. That said, it is good practice to guarantee 100% of the value of your company’s assets.
Suppose your company owns your building. Its value, and all the assets it contains, is $5 million. Let’s also say your business property insurance comes out at $4 million. If something happened to destroy the entire building and everything in it (e.g. a fire), you would lose that million dollars.
Talking to an insurance company can help you determine how much coverage you need to cover 100% of your assets. This ensures that you can replace everything if the worst-case scenario occurs.
Where do you take out hazard insurance?
If you don’t currently have business insurance, there are plenty of options for you. Before you buy, consider your business sector, assets, and potential hazards when choosing insurance. It is good practice to talk to an insurance broker before purchasing a policy.
If you are ready to buy business insurance, we recommend Next Insurance for almost all types of business insurance. Next Insurance offers affordable quotes to fit your business, starting at just $25 a month. Use our partner link for a free quote.
What other insurance policies should I consider?
Hazard insurance protects your business from physical damage, but there may be other types of insurance you need depending on your business. Below are three other common types of business insurance, but we have a definitive guide to business insurance explaining the top 13 types of business insurance.
General civil liability insurance.
General liability insurance protects you and your business if someone (a customer, vendor, etc.) is injured on your premises or while using your products and services.
Workers Compensation Insurance.
Work accident insurance covers medical expenses and lost wages when employees are injured or become ill while on the job. Almost all businesses that have employees require workers’ compensation.
Professional liability insurance.
Professional indemnity insurance (also known as Error and Negligence Insurance or E&O Insurance) protects you against claims of negligence or poor workmanship, and all subsequent financial losses, by covering the costs of lawsuits or legal action.
Conclusion – Hazard Insurance For SBA Loan
If you decide not to get an EIDL or if you do have one but still need additional financing, comparing small business loan terms is also an option.