When it comes to applying for a Small Business Administration loan, also known as an SBA loan, one aspect that is often missed is the importance of having life insurance.
Having a life insurance policy not only provides a safety net for your loved ones in the event of something happening to you, but it also plays a big role in securing an SBA loan. In this guide, we will delve into the different aspects of SBA loans & life insurance, including why it’s needed, the different types available (and why it’s relevant for your loan), and last but not least the steps you need to take in order to get the coverage you need to secure your loan.
Whether you’re a small business owner, or a self employed entrepreneur, this guide will show you the importance of life insurance in the SBA loan process.
Reasons Why SBA Loans Are a Smart Choice For a Small Businesses
Lower Interest Rates
An SBA loan usually has lower interest rates than traditional business loans. This is because the SBA guarantees a portion of the loan, resulting in less risk for the lenders. This allows them to offer competitive loan terms.
Longer Repayment Terms
Traditional business loans usually have strict repayment terms. However, when it comes to SBA loans they offer longer repayment terms than traditional business loans, which can help ease cash flow issues. This aspect of SBA loans allows business owners to run their operations without the added stress of extra overhead.
For example, if a business owner is looking to purchase equipment for their business, an SBA loan allows for them to afford it, and with a longer repayment term the business owner can spread the cost of the equipment over a longer period of time.
Flexible Use Of Funds
SBA loans offer a more flexible use of funds compared to traditional loans, allowing for small businesses to use the funds for all different types of reasons. This makes SBA loans more of a wanted option for small business owners who need money for all different types of things.
In contrast, traditional loans are often applied for with one use in mind, which results in stricter guidelines on how the funds could be used.
No Collateral Required
Many traditional loans require collateral. Some examples of collateral include real estate or equipment. Otherwise the business owner can’t secure the loan. However, when it comes to SBA loans, they may not require collateral for certain loan amounts, which is beneficial for small business owners who may not have the necessary assets to back up a traditional loan.
No collateral required could be an attractive option for start- up businesses or businesses that don’t have much of a track record of success or assets. This is a big advantage because a lot of businesses don’t have the assets available to put up for collateral.
No Prepayment Penalties
Last but definitely not least is the lack of prepayment penalties when it comes to SBA loans. When it comes to traditional loans, if you pay off your debt early you will be imposed a penalty. SBA loans don’t impose these types of penalties.The thought of prepayment penalties within the cash flow of a business could be frustrating, so going the SBA route could be great for businesses and takes a burden off of their shoulders.
Why Exactly Do You Need Life Insurance For An SBA Loan?
We mentioned above that collateral isn’t always necessary for SBA loans, but this isn’t always the truth. Obtaining life insurance is a crucial requirement when applying for an SBA loan because the life insurance policy is able to serve as collateral. In the event that something happened to the borrower, the remaining balance will be paid off with no issues.
In most cases, the SBA requires the borrower to have life insurance coverage when applying for their SBA loan. The SBA evaluates the businesses reliance on one individual (the potential borrower) when trying to determine whether or not the borrower needs life insurance to secure the loan.
The only way the SBA isn’t necessary to secure the loan is if the business could still be successful and thrive without the potential borrower.
Most borrowers don’t mind the fact that they need to get life insurance for their SBA loans though, as it not only secures the loan, but it also provides a peace of mind to the borrower that their family will be taken care financially of if something happens to them (none of the burden will fall on them).
Understanding The Types Of Life Insurance Required For An SBA Loan
There are a couple different types of life insurance. We will quickly go over what they are and which ones are important when going to get an SBA loan.
The first one is whole life insurance, this is a permanent life insurance that provides coverage for the entirety of someone’s life, as long as they pay their premiums.
Second up is Universal life insurance which is similar to whole life insurance because it covers people for the entirety of their life, but it’s different because it allows more flexibility in regards to adjusting the death benefit.
Next up is variable life insurance, which is another permanent life insurance which allows the holder to invest the cash value of the policy, which is considered much more risky than the others.
Last but definitely not least, is term life insurance. Term life insurance allows a holder to have coverage for a specified period of time.
Which One Of These Options Is The Best When It Comes To Getting an SBA Loan?
When it comes to getting an SBA loan, the best life insurance to get is term life insurance. Term life insurance is the best because it is a lot cheaper than whole life insurance and allows for flexibility. However, there is more than one type of term life insurance. Let’s dive into the different types of term life insurance and go into which type is best and why.
Renewable Term Life Insurance
Renewable term life insurance allows for you to renew the term, even after it expires. This is beneficial for people because to renew, you don’t have to go through the underwriting process again.
Convertible Term Life Insurance
This type of policy allows for policy owners to switch over to a whole or universal policy without the need of going through the underwriting process again.
Credit Term Life Insurance
Credit term life insurance is designed to help the term owner to pay off debts in the event that they pass away.
Decreasing Term Life Insurance
This type of policy decreases as you age. The policy decreases on a monthly or annual basis. The idea behind this is because the older you get, the less your loved ones will need you.
Level Term Life Insurance
Level term life insurance has a level death benefit the whole entire time you have the policy. It doesn’t go up, and it doesn’t go down. These policies last anywhere between 10-30 years.
Out of all of these types, level term life insurance is the best when it comes to getting an SBA loan. This is because it provides the lender with a guaranteed death benefit for the full term of the loan. The premiums are fixed and don’t go up, which is convenient for the holder in terms of their future budgeting plans.
Benefits of Level Term Life Insurance Include:
- Consistently low rates (especially if you started the term while healthy)
- Stable Cost Projections
- Death Benefit Stays The Same Over The Whole Term
- Cost-Effective, especially in the long run
How To Get Life Insurance For Your SBA Loan
Now that we went over why life insurance is necessary for getting an SBA loan, we’re going to go over the steps you need to take in order to get life insurance for your SBA loan.
Step One: Decide How Much Coverage You Need
Step one is deciding how much coverage you need. In this case, it’s going to be for as long as your SBA loan is. This way the lender could be repaid, in the event of death.
Step Two: Pick a Policy Type
Next up, you need to pick the policy type that fits your needs. As we discussed earlier, level term life insurance is going to be the best option for an SBA loan.
Step Three: Pick an Insurance Carrier
Picking a good insurance carrier is very important when it comes to life insurance. You want to make sure that the carrier is reliable, has good customer service and last but not least has experience when it comes to handling SBA loans.
Step Four: Get Quotes
Although life insurance quotes don’t vary as much as other types of insurance, it’s still important to get multiple quotes to make sure you’re getting the best deal.
Step Five: Apply For The Policy
Once you’ve decided on a policy and an insurance carrier, it’s time to apply for the policy. Make sure that all of your information is accurate and up-to-date. This will help speed along the process and get you approved quickly.
It’s important to keep in mind, when applying for a life insurance policy with the motivation of getting an SBA loan, you need to include the fact that you want to to apply with the intent of giving the lender collateral assignment.
Step Six: Approval Process
Once you’ve applied for the policy, it’s time to go through the approval process. This can take anywhere from two weeks to several months, depending on the carrier and how quickly they process applications.
Step Seven: Make Sure You Always Pay Your Premiums
Once you get approved, you want to make sure that you always pay your premiums on time. If the premiums are not paid on time, then the policy could lapse and leave your SBA loan unprotected.
Using The Life Insurance For Your SBA Loan: SBA Loan Process
Now that you know how to get the life insurance for your SBA loan, it’s time to talk about how to use that life insurance when applying for an SBA loan.
Step One: Determine If You’re eligible
There are a couple things you need to make sure you’re eligible for an SBA loan. These things include:
Operating For Profit: This means in order to be considered for an SBA loan, you need to be operating with the intent to generate profit. This means the business must be generating revenue as well as making an effort to constantly grow financially.
Practice Business In the U.S, Or Its Territories: The business must be operating or planning to operate in the United States or its territories. There are no loopholes to get around this, as each business that is eligible needs to be physically operating in the U.S.
Have a Good Amount Of Owner Equity To Invest: This means that the business needs to have a good amount of owner equity invested in it. Owner equity means personal funds you’ve invested into the business.
Seeking Alternative Financial Resources Before Applying: The government wants to make sure that you have exhausted all alternative resources before applying for an SBA loan. This means, if other financial options are viable and available, they should be explored first.
Choose a Lender
Once you’ve determined that you are eligible, it’s time to find a lender. Lenders are typically banks or other financial institutions. Make sure you do your research to find the best lender for your needs.
Gather Financial Documents
You’ll need to gather all of your financial documents in order to apply for an SBA loan. This includes income statements, balance sheets, and other documentation that proves your business is viable and worth investing in.
Apply For the Loan
Next up is actually applying for the loan. Make sure you fill out all forms accurately.
Next up is waiting on the approval of your loan. They may come back and need some additional information, so be prepared for this.
Once you’re approved it’s time to negotiate the terms by going over all of the details such as interest rates, repayment terms and other important details.
Here’s where your new life insurance policy comes into play. You’ll need to assign the life insurance policy as collateral in order to secure the loan.
Close The Loan
Once the lender approves the fact that you’ve added them as a collateral beneficiary, it’s time to close the loan.
Depending on the type of loan, and your individual circumstance, this process could take different amounts of time frames.
What Are Some Mistakes People Make When Getting Life Insurance For an SBA Loan?
There are some mistakes people make when getting life insurance for an SBA loan. Below we will go over what they are:
Not getting enough coverage for the loan
If your policy does not cover the term of the loan, then you won’t be able to close on the loan. Make sure your policy covers the entire length of the loan.
Not Paying Premiums On Time
If you don’t pay your premiums on time, then the policy could lapse and leave your SBA loan unprotected. Make sure you keep up with the payments to ensure that coverage remains in place. Not paying could result in you defaulting on the loan.
Options To Get Insurance For Your SBA Loan
For those searching for affordable life insurance options, consider CFA Insurance. They offer a quick and easy quote comparison tool to find the best rates from top providers, with no obligation to buy. With CFA, you can shop for the best deal without feeling pressured, and potentially save 58% on your life insurance. Check out their website now.
Life Insurance For SBA Loans
For SBA loan life insurance, LifeinsuranceforSBAloan.com is a top choice. Their three-step process is designed to make getting insurance as easy and stress-free as possible. Start by filling out their quote form or giving them a call, then work with them to get approved for a policy within one day, including the collateral assignment form. Finally, they will handle the recording process efficiently within 5-7 business days.