SBA Loans & Life Insurance: What Business Owners Need to Know

For many entrepreneurs, securing an SBA loan can be a game-changer, providing the capital necessary to expand operations, purchase equipment, or cover working capital. However, one lesser-known requirement that can significantly impact loan approval is the need for a life insurance policy.

The SBA’s Life Insurance Requirement

SBA lenders often require a life insurance policy as collateral to secure the loan. This requirement is particularly common for business owners whose enterprises heavily depend on their leadership and expertise. If the borrower were to pass away, the life insurance payout ensures the loan is repaid, preventing financial burden on family members or business partners.

A Real-World Example: The Challenges of Being High-Risk

Recently, we encountered a business owner looking to secure an SBA loan who was unaware of this requirement. At 83 years old, he was considered high-risk by insurance providers. As a result, obtaining the necessary coverage became a significant challenge. Here’s why:

Higher Premiums

Due to his age and potential health risks, insurers quoted extremely high premiums, making the cost of coverage an additional financial strain.

Approval Uncertainty

Some insurers may outright decline coverage for applicants at an advanced age or with significant health conditions.

Loan Approval at Risk

Without a policy in place, his SBA loan approval could be delayed or denied altogether.

What Business Owners Should Know

If you’re considering an SBA loan, it’s crucial to factor in the life insurance requirement early in the process. Here’s how to prepare:

Plan Ahead

If an SBA loan is in your future, securing a life insurance policy while you’re younger and healthier can prevent last-minute challenges.

Understand Your Options

Term life insurance is commonly used for SBA loans, as it is cost-effective and meets lender requirements.

Explore Alternative Financing

If life insurance is not an option due to health or age, consider other financing solutions such as revenue-based lending or asset-backed loans.

Take Action Now

For business owners planning for an SBA loan, ensuring you meet all requirements—including life insurance—can streamline the approval process and eliminate surprises. If you’re unsure about your eligibility for a policy, consulting with a financial advisor or insurance specialist can provide clarity and tailored solutions.

Need guidance on your SBA loan or alternative financing options? Contact us today to explore the best path for your business.

Disclaimer

This article is for educational purposes only and does not constitute financial, investment, or insurance advice. Business owners should consult licensed financial advisors and insurance professionals to understand their specific requirements and options.