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Life Insurance Criteria for Securing an SBA Loan

March 18, 20242 min read

Applying for Small Business Administration (SBA) loans has become more accessible with online applications, making them an excellent financing option for businesses seeking better loan conditions or those that might not be eligible for conventional small business loans. The SBA often provides more lenient terms regarding borrower's equity contribution, working capital inclusion, repayment timelines, and other elements to support small business success.

In 2021, the SBA's main lending programs facilitated 61,000 loans, totaling 4.8 billion dollars. For entrepreneurs considering an SBA loan, understanding the SBA's life insurance requirements is crucial.

The SBA requires life insurance for individuals responsible for repaying the loan as a safeguard, recognizing that the survival of many small businesses hinges on one or a few vital individuals.

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SBA loans are actually provided by a network of approved lenders, not directly by the SBA itself. The SBA guarantees these loans, meaning they offer financial backing, ensuring lenders are repaid even if the borrower defaults. This guarantee lowers the lenders' risk, which is why the SBA may require borrowers to have certain insurance policies, like "Key Man" life insurance, to serve as added security.

The SBA’s guidelines suggest that lenders should require life insurance on borrowers unless there’s sufficient collateral or a reliable alternative repayment method in place. In simple terms, without a solid succession plan or backup repayment source, lenders will need to ensure that borrowers have enough life insurance coverage to settle the loan through the liquidation of the business's assets if necessary.

Thus, the insurance coverage must equal the loan amount. For instance, a $500,000 loan necessitates a life insurance policy valued at $500,000, maintained for the loan's duration. Consequently, many opt for term life insurance to satisfy their SBA loan requirements. The policy allows for collateral assignment to the SBA, ensuring the loan is paid off first if you were to pass away during the loan term, with any excess funds going to your chosen beneficiary.

Insurance can be a maze, especially with timing challenges posed by the SBA’s late notification of insurance needs. Not securing life insurance early in the loan application can significantly delay the loan closing, as having the policy active is a prerequisite for finalizing the loan.

Choosing an agent or broker familiar with SBA loans can streamline the process and add no extra cost. Reach out to a TermLifeProvider agent at 855-468-8900 to explore life insurance options tailored to your SBA loan requirements.

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