Hazard Insurance for SBA Loans

Hazard insurance covers the costs of replacing or repairing the personal property, tools, equipment, furnishings, and inventory in the event of structural damage to your house or business.

There are various types of home and business insurance that may satisfy the SBA's hazard insurance requirements. If you own your home and work from it, you should be covered by homeowner's insurance.

Renter's insurance may be sufficient if you do not own the premises where you work. In either scenario, whether you work from home or not, your business must be listed on your insurance policy for the SBA to approve it.

Hazard insurance refers to commercial property insurance. Personal property insurance is not considered hazard insurance in some areas, so check your state's regulations.

Hazard insurance can cover a variety of risks, including the following:

Theft

Hazard insurance can cover the expense of replacing company assets if they are stolen from your property.

Damage from Storm

Natural disasters such as floods, hurricanes, lightning storms, and earthquakes may be covered under your insurance, depending on the terms and conditions. Every insurance is different, so make sure you understand what yours does and does not cover.

Damage resulting from Fire

The expense of replacing or repairing property damaged by fire is covered by hazard insurance. Ask about this coverage, as it may or may not be included as standard.

Water Damage

Accidental water damage, such as a broken pipe, water heater leak, overflowing sink, washing machine failure, and so on, is often covered by most insurance.

Vandalism

Your hazard insurance will cover the expense of cleaning, repairing, or replacing vandalized things if your business property is vandalized.

Small Business Administration (SBA) loan explained.

A Small Business Administration (SBA) loan is a loan for small businesses that is up to 80% backed by the SBA.

To put it in a simpler term, an SBA loan is a small business loan that is partly backed by the government (via the Small Business Administration), removing some of the risks for the lending institution.

The lending is not done by the Small Business Administration. The SBA partly guarantees the loans that these lenders issue to small firms, the SBA works with a network of recognized financial institutions (usually, traditional banks) that lend money to them more frequently and on better terms.

What this means is that the SBA will guarantee a loan amount that a small business obtains, so if you can't repay your SBA loan, the lender will know that the SBA will compensate for the percentage that they guaranteed.

There are various types of SBA loans but here are some that you may need to know.

SBA 7(a) loan program

The SBA's most popular loan program is the 7(a) program, which is only available through SBA-approved lenders. Businesses are eligible for a maximum loan of $5 million. The SBA will cover 85% of your loan up to $150K and 75% of loans exceeding $150K.

SBA 504 loan

Certified Development Companies, which are SBA non-profit partners, issue 504 loans (CDCs). The CDC (which is guaranteed by the SBA) will fund 40% of the loan, another lender will fund 50%, and the borrower must pay 10% of the loan with cash or business stock. For every $65K borrowed, the business must generate one job.

SBA Microloans

The SBA funds financial intermediaries such as Community Development Financial Institutions (CDFIs) and other nonprofit community-based groups to offer microloans (up to $50K). Microloans are then offered to businesses through these intermediaries.

EIDL loan

The current SBA Economic Injury Disaster Loan (EIDL) program, which concluded for new applications in December 2021, provides loans up to $2 million with a 30-year duration at 3.75% interest (2.75% for non-profits).

SBA Hazard Insurance

The SBA requires borrowers to obtain hazard insurance on all pledged assets as a condition of the loan. The borrower must submit a second insurance if the borrower's business location is in a state that requires additional coverage, such as wind, hail, or earthquake.

To protect the capacity to recover on the SBA loan, lenders and CDCs must guarantee that all collateral having a recoverable value is fully insured.

The loan authorization should specify the hazard insurance coverage criteria, which should not be canceled or decreased unless the insured assets have been sold or have depreciated sufficiently.

On their hazard insurance policy, the borrower should name the SBA or the lender/CDC as the loss payee. As a rule, the funds should not be released until supporting evidence has been produced that proves that the insured asset has been appropriately replaced or repaired and that no construction or repair-related liens have been recorded against the property.

This is especially true for insurance checks worth more than $10,000. The lender or CDC must supervise and monitor the disbursement of insurance proceeds if the borrower does not have acceptable supporting paperwork.

Hazard insurance is required for most SBA loans. However, one of the major contrasts between the EIDL and PPP schemes is that the former requires hazard insurance, whereas the latter does not.

‘EIDL loans require hazard insurance’

Natural calamities such as hail, fire, and water damage are covered by hazard insurance—and any insurance policy that falls within the hazard insurance category.

For instance, imagine there's a hurricane in your neighborhood, and the water wipes away all of your computers. Your hazard insurance coverage would cover the expense of repairing or replacing them, allowing you to resume operations.

If you live in a special flood hazard area in some states, such as California, you may also be required to obtain and maintain flood insurance for the entire insurable value of your business property for the duration of the loan.

The EIDL hazard insurance criteria now state that you must have coverage for at least 80% of the amount borrowed under the Economic Injury Disaster Loan program. Of course, you can insure up to 100% if you want to.

Hazard Insurance and how it works.

Hazard insurance functions similarly to other types of property insurance. Your monthly premium is determined by your assets and property, as well as the amount of coverage you desire.

You would make a claim with your insurance provider if anything happened, such as a fire that destroyed everything in your firm.

The claims adjuster would visit your home to inspect the damage and figure out how much the insurance company would pay you for the loss. You can fix or replace what was harmed after you receive the money.

Hazard Insurance Restrictions under the SBA EIDL

Hazard insurance is one of EIDL's usage restrictions. Here are a few situations to keep in mind.

Businesses that are run from home

How can you get hazard insurance if you run your business out of your home? Your homeowner's policy will protect some of what you need, but you may also need a business owner's policy to cover the equipment and assets in your operation.

This protects your business equipment from both liability and property damage. A home-based business policy, which is an addition to your existing homeowner's policy and covers business equipment and liability, is another alternative.

Not Having Ownership of the Property

You'll need renter's insurance to qualify as hazard insurance if you don't own the premises where you conduct your business, whether it's a home-based business or a commercial location. If it's a home-based business, just make sure it's included in the policy.

Hazard Insurance: How to Apply

You'll need to acquire quotations from a few business insurance firms if you've been told you require SBA EIDL hazard insurance and you don't have a policy that gives you qualification.

You'll be questioned about your company, including if it's home-based, how many staff you have, and what industry you're in. You'll have to decide what kind of coverage you want. Some insurers will give you a discount if you combine multiple policies.

Based on the information you submit, a rate will be assigned to you. To identify the most suitable rate, it's a good idea to get quotations from multiple insurance companies.

Hazard Insurance Costs

The cost of SBA EIDL hazard insurance is determined by numerous factors, including:

• Your assets' worth

• What type of property do you have?

• Your industry

• How many insurance claims have you previously filed?

• The number of staff you have employed.

Bundling numerous forms of insurance with one provider, which may result in a discount, is the greatest method to save money on your coverage.

In addition, paying for your complete annual coverage in one payment rather than monthly may save you money.