SBA Loan Life Insurance, The Ultimate Guide
One of the most challenging phases of a business is when it is small and new. At this point, the finances are tight and every cent made goes straight back to the business to help it grow. Once the first stages of a business are over and it becomes a success, the owner(s) slowly start enjoying the benefits. But most businesses barely make it through the first few months, if not years, and the few that do only survive through resilience and a lot of hard work.
Most of these successful businesses overcome their financial challenges through SBA loans. These are sometimes hard to qualify for, but are a great jumpstart for most small businesses. And for any small business to qualify for an SBA loan, they must have a life insurance policy to get approved.
What is an SBA Loan?
These are government-guaranteed loans mostly issued by banks and other participating lenders, to small businesses. Since they are guaranteed by the government (Small Business Administration), the lenders face lesser risks when compared to other traditional loans. The most misunderstood aspect of SBA loans is that the SBA directly gives loans to small businesses. But micro-lending institutions, lenders, and community development organizations give out the loans following guidelines stipulated by the SBA. Through a guarantee that the loans will be paid back, the SBA lifts the risk associated with lending for these partners.
So businesses apply to lenders for commercial loans only that these loans follow SBA guidelines. Also, applicants may not qualify for the loan if they have other financing options available to them with sensible terms.
In most cases, SBA loans are offered through banks and can be up to $5 million with an 85% guarantee of the proceeds. When compared to traditional loans, it means that the lender can take on more risk. If you need to apply for an SBA loan, you can directly inquire from your bank if it offers them, but the best thing to do is to check the participant’s list of lenders from the SBA website. This way, you get more options to choose from.
If you’re looking for a smaller SBA loan, then you can apply through nonprofit community-based organizations to get access for up to $50,000 in a loan. You should also be able to find these organizations from the SBA participants list. Prime rates are used to determine the SBA guaranteed loan interests. The SBA is not responsible for directly making the loans, so it has no power to set the rates, but it is responsible for interest regulation on any SBA loan borrowed.
There are express loan programs for individuals who want to skip the extra paperwork and prolonged-time when it comes to applying for an SBA loan. You need to provide collateral as well as sign a personal guarantee, just as it is with regular SBA loans. The only problem is that you may receive the loan in parts instead of all at once. Apart from the interest costs, you should pay, you may also incur extra costs like servicing and guarantee fees.
Some small businesses are usually unable to access surety bonds often offered by different commercial channels. Such contractors can access them through the SBA program known as the Surety Bond Guarantee. Depending on the contractor, SBA offers bonds of up to $10 million with the most common being up to $5 million.
Types of SBA Loans
The most common types of SBA loans include 7(a), Microloans, and CDC/504.
7(a) loans are the most common and are tailored for existing businesses and startup real estate needs. Basically, they are meant for general business applications where the SBA caps the interest rate chargeable to a certain amount that is usually more than the prime rate.
Microloans are below-standard loans, meaning that the loan amounts are way lower than standard loan amounts. SBA Microloan lenders that meet all qualifications access these loans on both low-cost and long-term basis. Businesses are then able to borrow the loans through the microlenders in shorter repayment terms and in smaller amounts.
504 loans are mostly used to generate commerce through machinery, real estate, and equipment. 504 Local Development Company Programs are supposed to collaborate with other Certified Development Companies to provide long-term funding with fixed rates to small businesses.
Generally, the SBA funds their loans through three major lenders that include certified lenders, infrequent participant lenders, and preferred lenders. Certified lenders include lending institutions with SBA trained and certified staff. Also, these are also lending institutions that frequently participate with the SBA. The lender is supposed to forward the application documents to the SBA after approving them.
The infrequent participant lenders are supposed to forward all the loan guarantee paperwork to the SBA which has the power to approve or deny the loan. These lenders often consist of banks and nonbank lending institutions.
Preferred lenders, on the other hand, are simply high performance certified lenders. The SBA chooses preferred lenders through the criteria of the most reliable partners whom they give the final approval for loans applied through them.
Only a few banks get to qualify for the Preferred Lenders and the Bank Certification Programs since there are set stipulations for such. These include more than 10 years of SBA lending, community lending record, assistance to small businesses, and prudence.
SBA Loan Qualifications
While SBA loans are available for small businesses, every applicant must pass the eligibility test. There are several things that may hinder you from getting qualified and they may vary from one lender to the other. Read on to see what you need to get qualified for an SBA loan.
Every small business lender has their own requirements and qualifications. Before sending your application, ensure to check with your lender to see the requirements and qualifications they have put in place. What one lender offers may not be the same as what another one offers. You will find that some lenders are flexible and will approve your application even when you underachieve in one area and overachieve in others.
This does not mean that you will qualify with below-minimum qualifications. Just ensure that you meet all the qualifications needed in order to impress your lender. Note that there are criteria followed by lenders when determining applicants who get to qualify and those who don’t. This could be anything with regards to how long you have been in business, your credit scores, and annual incomes, just to mention a few.
Do your homework well and weigh the options you have against what you have to offer, then choose with regard to your strongholds.
A business plan is an important asset to any business, and so is it to any lending institution. Any lender will want to know how you plan to multiply your profits, how capable you are of paying your debts, how you are and how you plan to manage your expenses and everything in between. Ensure to develop a proper business plan that includes your business’s financial projection, your service/product description, company description, industry analysis, marketing, and sales analysis, management team, facilities, and operations plan, and lastly, your SWOT analysis.
A well-put together business plan shows your lender that they can trust your business and that you are able to pay back the loan. Also, they gain confidence since they can understand what your cash flow looks like and how the money will be put into use.
Size of the Company
While SBA is meant for small businesses, every company that applies for the loans has to meet their size standards. In relation to the industry, there are different ways of measuring the size of a company and these include the business revenue, the business net worth and the number of employees.
To qualify for an SBA loan, your company’s net annual income has to be ranging between $0.75 million to $38.5 million. Also, you will qualify if the net worth of your business is below $15 million. And lastly, if your business consists of employees between 100 and 1,500, then you are eligible for an SBA loan.
Not every business succeeds, some fail even before bringing back profits, and lenders are aware of this. That is why you will need to provide collateral as part of the requirements of SBA loan qualifications. Your lender will want to be assured that they will get their money back in case your business fails.
Collateral is simply an asset and can range from real estate to inventory or even equipment that can be liquified to repay the loan. In addition to the collateral, before qualifying for the SBA loan, your lender will request a guarantee if you own more than 20% of the business. In fact, some lenders only request the personal guarantee leaving out the collateral.
When it comes to collateral, different lenders will have different requirements and specifications tailored to what they are offering. Always make sure to ask questions where you don’t understand before you make assumptions about what you think you know.
Your personal credit scores will also help determine if you qualify for the SBA loan or not. A lender has to be convinced that you respect your debts and as such, a good personal credit score is important. Oftentimes, the FICO score is usually used by small business lenders to make their lending decisions.
This is depended on a few elements including a 35% score of your payment history, 10% score on the types of credit in use, 30% score on debts including credit card debts, 10% score on recent credit inquiries, and 15% score on the period of time you have had credit.
You may pay back what you owe on time, but your credit reports are prone to errors, which may negatively affect your credit score. Work on building your creditworthiness and every once in a while go through your credit reports to ensure that there are no errors.
Financial and Legal Documents
To qualify for an SBA loan, you may also be required to produce several financial and legal documents. Through such documents, your lender will be able to substantiate the legitimacy and competence of the business. You will be required to provide documents like profit and loss statement, statement of financial position, income tax returns, business licenses, articles of incorporation, both business and personal bank statements, financial projections, commercial leases, and photo of your driver’s license.
A resume also shows your experience in business and any pertinent managerial skill sets you to have. While it is great for businesses looking to finance a huge investment through a long-term loan, the only downside here is that these documents may slow down the approval process.
Why Do I Need Life Insurance for an SBA Loan?
As a small business, you may not understand the importance of life insurance when taking an SBA loan. Even most applicants don’t know that it is a basic requirement to have life insurance until they are requested to provide a policy in order to qualify for the loan. A life insurance policy plays a huge role in the approval of SBA loans and it will be a top requirement when applying for the loan.
This reduces the risk they will have to incur in case the loan defaults for whatever reason. When starting up a business, you cannot ascertain its failure or success and as such, it is a gamble for the lender giving you a loan to fund the business. So, the life insurance policy is used by the lending institution as collateral for your loan. This means that if you are unable to pay the loan, whether it is because of your untimely death, or failure of your business, the policy proceeds will be used to pay the remaining loan balance.
Before applying for a loan, it is good to lock in a life insurance policy, in most cases, term life insurance is recommended for SBA loans. The coverage amount should be aligned to the loan term as well as the size of your business. In most cases, the beneficiary listed is usually a loved one, but in this case, you will need to list your lender as either the sole beneficiary or name them as a beneficiary who will receive a certain amount of the benefit.
Once your life insurance policy is in force, you can proceed to request your insurer for collateral assignment paperwork. Alternatively, you can apply for the collateral assignment through your bank. It is important to make an inquiry first because not all insurance companies accept collateral assignments, and some banks are usually specified with the insurance companies they work with.
How Does it Work?
LIfe insurance for SBA loans works a little different for traditional life insurance policies. The life insurance policy should fulfill all the requirements of the SBA loan, that’s why not all life insurance policies will work for you.
First, before your loan is approved, you need to make sure that the life insurance policy is in force with the revenue creator. Also, the current amount of your outstanding loan should be fully covered by the policy benefit. This means that if the death benefit amount is not enough to cover the loan principal amount, then it cannot qualify.
The term duration of the SBA loan should not exceed the life of the insurance policy, it should be vice versa, or optionally to ensure that both of them should match. If the life insurance policy term ends before the loan term then the lender may risk losing their money. Also, before the loan is approved, the applicant will be required to provide a proper collateral assignment.
Before you purchase a life insurance policy, first figure out the amount of coverage you will need to get your SBA loan application approved. Also, how much time will you need to fully pay the loan? This way you will avoid locking an insurance policy with a lesser term compared to the loan term. In case you repay the SBA loan sooner than you had expected, you will be in a position to cancel the policy without facing penalties.
What is Collateral Assignment?
Put simply, a collateral assignment is a contractual agreement that states the lender of a loan as the beneficiary of the life insurance policy. A collateral assignment is meant to protect the lender and reduce the risk of a loan default if and when the borrower dies before the loan is fully paid. So, setting up a collateral assignment is a basic requirement for most lenders to their applicants just to ensure that they don’t risk losing their money.
What Type of Life Insurance Should I Get?
A lot of people end up choosing the wrong life insurance policy for their SBA loans. Before setting out to apply for life insurance, you want to make sure that you understand the requirements and outcomes of choosing an insurance policy for your SBA loan. And this is where a lot of people go wrong. You want to avoid headaches in the future, so look for as much information as you can about the different options available for you. That said, the following are the major types of life insurance policies best for SBA loans.
Term Life Insurance
By far, term life insurance is the best type of life insurance policy for SBA loans. The loan term is predetermined and for a certain period of time, so you will not necessarily need a lifetime coverage for your insurance policy if it is strictly for repayment of the loan. Most life insurance policy terms will differ with the most common ranging from 5 years, 10 years, 15 years, and so on, up to 30 years. It is the most preferred life insurance policy for SBA loans simply because the term periods often match or slightly exceed the term of the loan.
Also, they are the best bet for someone who wants to minimize the premiums payable for the policy to stay in force. For example, if you have borrowed a 5year loan, then you can purchase a 5-year term life insurance policy. Also, assuming it is an 8-year loan, a 10-year term life insurance policy will be the best in this case. Then, you can cancel the policy at the 8th year after your loan is fully paid.
No Exam Term Life
Purchasing life insurance can be a headache, especially with all the paperwork included to get approved. A no exam term life insurance, which is also the simplified issue is best for an individual who wants to get approved faster than it usually is with term life insurance policies.
Usually, when applying for your life insurance policy, you will be required to undergo the underwriting process which is usually a full medical examination. During the underwriting process, you may also be required to fill out a medical questionnaire or answer a few questions with regards to your family health history and background.
A no exam term life insurance policy skips all the medical examinations and in-depth questionnaires. However, insurers are different and some may require you to answer a few questions or fill out short questionnaires to get approved. The good thing about no exam term life insurance policies is that they get approved faster than other underwritten policies.
While the latter may take weeks to get approved, no exam term life insurance policies usually take days and if lucky, hours to get approved.
How to Shop for SBA Loan Life Insurance
It is not worth going through the whole application process which most of the time is daunting, just to get your life insurance denied by your lender. Some people end up frustrated after their application is denied simply because of ignoring the small details. And it is nobody’s fault since it can get complicated, especially if you are not provided with the right kind of information. So it is always good to know where to look and what to look for. There are two effective methods of shopping for an SBA loan for life insurance.
Work With a Pro
If you are not ready to go through the whole process of applying for a life insurance policy, you can consider working with a pro. The biggest and primary advantage of working with a pro is that they do all the heavy lifting for you. You don’t have to worry about which insurer to choose and why, or even how to apply.
An experienced agent should be in a position to present you with a list of different insurance companies suitable for your needs. The thing is, agents with a lot of experience have easy access to different companies which translates to more insurance options for you. Even better, your agent is going to advise you on the best policy for you with clear reasons why you should choose it.
As opposed to approaching a single insurance company, an agent will give you unbiased advice. If you are working with a single insurer, then you will end up believing that they are your best shot, and they will only advise you with the aim of selling their products to you.
Additionally, working with a pro will one way or another save you money. When you choose to work with an insurance company, you are limited to that single insurer and cannot establish other cheaper insurers out there. Since your agent has a list of different insurance companies, you will be able to choose the cheapest option tailored to your needs. What’s more, it is easier to get discounts through an agent than when working on your own.
If you choose to work on your own, then you have to be smart about it. And choosing the first offer you land is not being smart. Talk to different insurers and ask for a quote, then make a comparison list.
Which rates are the best from your list? And even if a company has the best rates, from premium rates to the coverage amount, does it suit all your needs? Remember that having the cheapest rates should not be your last resort. The odds may still work against you, so the more information you have about a particular prospect and their products, the better placed you will be. This especially true if you’re not in perfect health as companies classify risks differently.
SBA Loan Life Insurance FAQs
Can I still qualify for an SBA loan life insurance if I have been denied by more than one company?
Yes, ask life insurance pro for any other available insurance companies with a solution. When shove comes to push, a graded policy could be the next best solution. This is a simplified issue policy without a medical examination. The only downside is that the coverage amount is usually limited to a certain amount which may be less than the loan amount.
What should I do if I cannot afford the premiums?
Check with your carrier to see if they can allow you to build the cost of the policy into the loan. The SBA understands that it can be difficult for a new business to make premium payments especially because the available capital is getting pumped into the business. You can also get discounts if you choose to make annual policy payments.
What steps should I take if my policy and loan terms don’t match?
The best thing to do is to purchase an insurance policy with terms that exceed those of your loan. It is also okay if the policy amount exceeds that of the loan since you can always cancel the policy whenever the loan is fully repaid.
What happens if I choose a decreasing term product?
You will incur an opportunity loss in the death benefit and also end up paying more for the policy. A decreasing term product sounds like the best option for most applicants since the death benefit decreases with the decrease in the remaining loan principal. If it was a regular term policy the remaining death benefit after the remaining principal is paid is given to the listed beneficiary.
What is the best thing to do if we have two or more owners?
It is best to have separate policies. You need to think of future possibilities, for instance, will the business operate as usual with an outstanding balance if the one you pass away? If in such a scenario the business would be unable to make payments are required then it is advisable to have separate policies. Having separate policies helps avoid the need to set up a different agreement in the future.
Do I need to purchase a new policy or should I use the one I have?
Yes, but not in all cases. While a lot of insurance companies allow it, some carriers don’t and with the exceptions where an old policy is acceptable, it has to meet all the requirements. Also, repayment of the loan becomes a priority of the death benefit even if you had it was initially slated for the needs of your beneficiaries.
Should I choose term life or whole life insurance for an SBA loan?
Term life. It is the most recommended life insurance policy for SBA loans since the coverage is meant for a specific period of time, which can be equal to or may exceed the term of the loan. Term life is also affordable and allows for the flexibility needed since the loan does not last forever and is meant to be repaid after a certain period of time.
Work With us
We are an independent agency dedicated to solving all your problems while ensuring the whole process is painless for you. An experienced agent will walk with you every step of the way, and all you need to do is provide any important information and let them do the hard work for you. You can compare quotes for SBA life insurance here.