Life Insurance for SBA Loans: Top Mistakes to Avoid & How to Apply & What is the cost?
SBA Loans refer to loans that the government guarantees and are issued through banks to small businesses. Alternatively, SBA loans refer to low-cost government funding. The biggest advantage that SBA loans have over traditional loans is that they have lesser risks. Most borrowers do not know that the Small Business Administration (SBA) is not responsible for issuing loans. However, banks, micro-financing firms, and community development organizations lend out SBA loans under the guidelines set by the Small Business Administration. These loans can be up to $5 million with a guarantee of approximately 85% of the returns.
However, it is advisable to avoid applying for SBA loans if you have other financing options.
Why Small Businesses Need SBA Loans
Business start-ups barely survive the first year due to financial constraints. During the first year, small businesses need a sound financial base that will support the introduction of new products, expansion, and payment of marketing and advertising costs.
The managers must work hard, cut their budgets and adjust their lifestyles to push the business through the first phase before they get to enjoy the benefits. If you’re in the market for a business loan, a US Small Business Administration (SBA) loan is one of the most advantageous financial sources for entrepreneurs. But before any business qualifies for an SBA loan, it must have an approved life insurance policy.
What are the requirements to get an SBA loan?
Most SBA loans for small business owners provide the right type of business financing. Remember, SBA lending is low interest, and if a business meets the minimum requirements, then this will be an affordable way to pay for it. SBA loans are flexible, and a business can use the loan to purchase property, buy a product, repair the credit history, or expand the business. SBA lending is extremely competitive due to incredibly favorable terms. Applications for an SBA loan are often complicated, but one can easily get the loan if they meet the requirements.
Eligibility Requirements for the person applying for an SBA Loan
Most companies qualify for the loans, but the SBA has enlisted strict requirements for businesses.
- Business Activities– The lender demands that they should know the businesses’ activities and how they generate income. The law is to avoid funding illegitimate businesses.
- Repayment Positon-The business must be in a position to repay the SBA loan.
- Business Location– The lender must know the business operation locations and their operations.
- Character Traits of the Founders– The lender must have knowledge of the characters of the founders.
Requirements that Businesses Must Meet
- It should be a for-profit business
- The business must have invested in equity
- The business must have exhausted all the available financing options.
- The business must be located in the United States of America.
Do you need A life insurance policy for SBA loans?
All loans need collateral, including the SBA loan. If you need an SBA loan, then you must have life insurance as collateral. SBA does not offer the loan directly to the business owner. You need life insurance on your SBA loan because it is not financed through the SBA directly by you. Instead, borrowers get loans from a lender, and the federal government provides subsidized loan payments for the loan once the loan is received.
The SBA wants to protect its investments, which requires that the borrower have liquid assets to repay his loan. The safeguards decrease the risks for banks and the SBA. SBA SOP 50-10-5(b) states that a creditor may no longer receive collateral for a loan that was repaid. In this case, a banker cannot be a beneficiary.
You must also note that your life coverage policy must last through the entire period that you are repaying the SBA loan. If you default on the loan repayment, the lender has the power to request you to return the loan. Therefore, the whole procedure starts by securing life insurance for SBA loans.
Remember that if you repay your SBA loan, then there is no need of cancelling the loan. In some cases, the lender cannot be named as the beneficiary; therefore, the loan automatically becomes your annual life insurance policy.
How to Purchase a life insurance policy for Your SBA Loan
SBA loan approval may aid in growing businesses. The news of approval from the lender could have repercussions on the entire financial situation. However, it’s impossible to avoid bumps and lengthy waits when you get insurance policies in place. It’s good to know that the procedure is easy to navigate. You can fill out the no-exam life insurance. However, you need to remember that apart from life insurance coverage, the borrower can also buy the disability coverage or use the key person life insurance.
Why life insurance policy for an SBA loan is vital?
Life insurance is a mandatory requirement for an SBA loan. If you have life insurance, then you must be very careful. A permanent life insurance policy with a cash value reassures the lender that they will be able to reclaim their costs with access to the cash value to use as loan payment if the borrower defaults.
The term life insurance benefits include:
- The insured’s beneficiaries will get death benefits if the insured person dies.
- Term life premiums are based on the health, age, and life of a person
- You can flip a term life to a whole life insurance
- You can use a term life to get an SBA loan.
5 Mistakes that People Make When Applying for Small Business Administration (SBA) Loans
Research and read widely about small business loans before making any applications. You should understand the details of life insurance requirements when applying to get SBA loans. The SBA states that all loan applicants must have life insurance policies to receive small business loans unless an application for a small business loan is approved. In the event the small business owner is directly associated with the business income, the lenders may require purchasing life insurance policies.
Mistake One: Neglecting Collateral Assignment
According to the SBA regulations, a collateral assignment is a designating of an entity, such as the lender who is a conditional recipient of a part of the death benefit of your life insurance policy.
After choosing your preferred insurance policy, you need to fill out a collateral assignment form. A collateral assignment appoints your lender as a beneficiary of your life insurance policy proceeds.
The significance of the collateral assignment is that it empowers your lender to collect part of the life insurance death benefits should you die before you finish repaying the loan. If the death benefit compensations repay the SBA loan and some monies remain, they can be allocated to the other beneficiaries.
Collateral assignments act as risk aversion and offer a safety net for the lender.
Mistake Two: SBA Loan Does Consider No Exam Life Insurance
If you are applying for the SBA loan and you are in a hurry, please get the no exam life insurance policy. No exam life insurance policy means that the SBA loan applicants will not undergo any medical exam.
The no-exam life insurance policy takes a few days to get plus it offers a wide range of premiums. You can easily avoid medical exams if you do not like the needles.
Mistake Three: Policy Face Amount and Term are Inappropriate
Your life insurance policy must match the amount of the SBA loan. This means that the applicant must know that in case he dies, the life insurance death benefits can pay off the loan. You can check the display quotes life insurance for SBA loans on various banks to learn more about the loans.
Mistake Four: Fail to Partner With an Independent Life Insurance Agent
An independent life insurance agent does not have any affiliation with any insurer and must also be a licensed life insurance agent. The agent is independent and his role is to work and get you the best life insurance policy in the market. The independent life insurance agent makes a comparison of all the policies and gets you the best life insurance coverage that fits your needs.
If you get an agent that works with a particular life insurance company, then you may have to take their life insurance policy. While a captive agent only represents one life insurance company, an independent life insurance agent is not restricted to any of the company’s products.
Mistake Five- Ignore Legal Requirements
You must read through the details of the SBA loan before making an application. Most people ignore SBA’S SOP 50 10 5(B), which is a document that describes SBA loan requirements. According to the article, the lender must determine if the viability of the business is tied to an individual or individuals. If yes, the individuals need life insurance.
This means that most lenders need a borrower that has valid life insurance. The individuals connected to the business must have life insurance to guarantee the lending of SBA loans.
Small businesses need good funding to survive in the formative years. The best source of funding is the SBA loans which attract low interest and risks. But you require a life insurance policy to get the SBA loans. Alternatively, you can use key person life insurance.