The type of insurance required for a business is dependent on the size of the business and the industry the business operates in. For example, it is highly recommended, if not required, that a restaurant have liquor liability or DRAM shop insurance to protect against intoxicated patrons.

Hazard Insurance/Commercial Property Insurance:

The most common insurance required is hazard insurance (also called commercial property insurance). If the SBA 7(a) loan size is greater than $500,000 then the SBA requires that all assets pledged to the SBA 7(a) loan have hazard insurance. If the loan amount is less than $500,000 but collateralized by real estate then the SBA requires hazard insurance. However, if the loan is less than $500,000 and is not collateralized by real estate then it is up to the lenders (banks) discretion whether the business needs hazard insurance.

What’s the importance of hazard insurance? Hazard insurance is used to pay out when buildings are damaged in accidents or natural disasters. In other words, hazard insurance protects the business from extreme loss. In certain situations, that loss could push a business into solvency.

An owner, operator or investor of a SMB can purchase hazard insurance right away and their business should be protected within a few days from purchase. From a cost perspective, the cost of insurance is dependent on the size of the loan, building, location of property, etc.

Liability Insurance:

Liability insurance (sometimes called general liability insurance) will help cover a business from property damage and bodily harm. Most SBA loans will require this type of insurance and/or flood insurance depending on the location of business.

For general liability insurance it can take approximately 24-48 hours for proof of insurance to come through and the cost of insurance is highly dependent on the size and complexity of the business. For example, the cost of flood insurance for a business that operates in Florida is going to be significantly higher than a business that is near a lake in Kansas.

Worker’s Compensation Insurance:

If the business has employees or will have employees, it is critical that the business has worker’s compensation insurance. Worker’s Comp can offer benefits to employees if those employees become injured or ill on the job. Common coverage examples are listed below:

Medical treatment
Wage benefits
Funeral expenses
Disability benefits

Worker’s compensation insurance is meant to protect the business from unforeseen injuries of its employees. If there is no insurance, the cost could hit the bottom line of the business or worse, the employee could sue the business for lacking worker’s compensation insurance because it is required by law in 49 of the 50 states. Texas is the only state that does not mandate worker’s compensation insurance.

Again the cost of workers compensation insurance is dependent on the size and complexity of the firm. In terms of speed, a business could get workers compensation insurance within a few days; however, it is beneficial to start the process early to optimize the cost, coverage and service of the insurance.

Life Insurance:

Life insurance for a business is set-up for worse case scenarios where the owner or operator passes away. For SBA 7(a) loans, life insurance will be required on sole proprietorships, single member LLCs, or any person deemed essential to the business if the SBA 7(a) loan is not fully collateralized. In essence, the life insurance policy is meant to protect the bank if there's an unexpected death in the business and the business shuts down or becomes insolvent.

For life insurance, it can take a few days to show proof of insurance; however, it is recommended to start early that way the owner is properly covered. The cost of life insurance is going to depend on many variables such as the size and complexity of the business, health of the owner, and size of the SBA 7(a) loan.

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