Small businesses often require financial assistance to grow and expand their operations. The Small Business Administration (SBA) provides various loan programs to support small businesses, including the Economic Injury Disaster Loan (EIDL) program. This program provides low-interest loans to businesses that have suffered economic harm due to disasters such as COVID-19. However, to qualify for an EIDL loan, businesses must have hazard insurance.
Hazard insurance is a crucial component of any business’s risk management strategy. It provides protection against financial loss resulting from damage or destruction of property due to natural disasters, theft, or other hazards. In this blog post, we will discuss what hazard insurance is, why it is necessary for SBA EIDL loans, and how to obtain hazard insurance for your business. We will also provide tips on how to optimize your hazard insurance coverage to ensure adequate protection for your business.
What Is Hazard Insurance?
Hazard insurance (also known as Property Insurance) is a policy that protects your business property from fire, certain natural disasters, and other covered causes of loss. It can be added on or included in insurance package policies, or serve as standalone coverage.
Do You Need Hazard Insurance?
You need hazard insurance to apply for a small business loan from the Small Business Administration (SBA). The SBA (and most lenders) want to see proof of property coverage on an insurance policy that shows that the business owns tangible assets that can be collected if they can’t pay back the loan.
For example, if a construction business wants to take out a loan for a piece of equipment and can’t pay back the loan, the lender can claim ownership of the equipment.
What Does Hazard Insurance Cover?
Hazard insurance covers direct physical damage from a range of unforeseen circumstances, including:
- Blizzards or hailstorms
- Water damage
- Vandalism and theft
- And more
How Much Does Hazard Insurance Cost?
The cost of hazard insurance depends on a few factors, such as:
- The age, value, and location of the property
- The limits and coverage options you choose
- Type of property
- Whether or not you choose full replacement cost or a different valuation — such as actual cash value or agreed value — which have different payouts than full replacement costs
Hazard Insurance and SBA Loans
Economic Injury Disaster Loan (EIDL)
If you have suffered substantial economic injury and are one of the following types of businesses located in a declared disaster area, you may be eligible for an SBA Economic Injury Disaster Loan (EIDL):
- Small business
- Small agricultural cooperative
- Most private nonprofit organizations
The SBA can provide up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. Your loan amount will be based on your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.
Why Does the SBA Require Hazard Insurance for EIDL Loans?
The SBA requires hazard insurance for certain EIDL loans to protect their own loan collateral. It’s a last resort option — other insurance policies should be sufficient.
Hazard insurance is required for loans over $25,000, with real estate being the preferred collateral. Loans of $200,000 or less do not require the owner of the business to use their primary residence as collateral if it is determined the owner has other assets of equal quality and a value equal to or greater than the amount of the loan.
Furthermore, business property insurance on a building or business personal property may also be used as collateral.
Minimum Coverage for SBA Disaster Loans
The minimum amount of coverage for SBA disaster loans must equal at least 80% of your loan amount. The insurance must be under the name of your business (and you must prove you own business property). If you operate under a DBA (doing business as) it must be listed on the insurance policy.
Since a homeowners insurance policy may not be sufficient to cover your business assets, home-based businesses may need a business hazard insurance policy in order to be eligible for an EIDL loan. Your SBA loan officer should be able to assist you with determining whether you need additional hazard insurance.
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.
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.
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.
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.