While it would be nice to walk into your local bank, pitch your business, and walk out with a loan, lenders usually don't work that way – and for good reason.
They need to know you're a safe bet before they hand out the cash.
That's where insurance comes in. This protection shows the bank that your business is a good risk. Here are three policies loan officers typically look for.
1. Commercial Property Insurance
Commercial Property Insurance is pretty self-explanatory. You need stuff to run your business, such as an office, computers, furniture, etc. Property Insurance makes sure you can afford to repair or replace your things if something terrible happens, including…
Why your lender looks for this policy: Lenders have two reasons to care that your property is insured:
- They want to know that your business can survive a catastrophe and ultimately repay its loan.
- Some may also require you to put your assets up as collateral. Insurance on those assets protects your lender's interests.
Lenders tend to prefer Property Insurance written as an open-perils / all-risk policy. An open-perils policy offers more protection because it can cover any event other than the few it specifically excludes.
2. General Liability Insurance
Small-business owners get sued more often than you think – and it's not cheap. A study by the Small Business Administration found a lawsuit might cost a small business between $3,000 and $150,000.
Why your lender looks for this policy: Lenders have a vested interest in making sure a lawsuit doesn't shut down your business so you can keep repaying your loan. That's why they usually want you to have General Liability Insurance. It may help pay for legal expenses when you're sued over:
- Customer injuries and property damage.
- Product liability.
- Advertising mistakes (including libel and slander).
Many lenders look for a "right and duty to defend" provision in your policy. That wording means your insurance provider must help manage the litigation process. Without that language, your carrier only has to cover the costs.
3. Workers' Compensation Insurance
If you have employees, you might need Workers' Compensation Insurance. It can help cover medical expenses and lost wages for work illnesses and injuries, such as…
- Repetitive-motion injuries (e.g., carpal tunnel syndrome).
- Injuries after an accident (e.g., broken bones after a fall from a ladder).
- Occupational diseases (e.g., cancer after prolonged exposure to asbestos).
Why your lender looks for this policy: Most states require employers to carry this coverage, so your lender may check for your compliance. Without the policy, you could owe some hefty fines.
Plus, you'd still be on the hook for your hurt employee's medical expenses. According to the National Safety Council, the average workplace injury claim costs a whopping $36,551.
In short, forgoing Workers' Compensation puts your business at risk – and that puts your lender's money in jeopardy, too.
Thank you to Max Schleicher for this week's guest post. Max is based in Chicago and is a content outreach specialist and writer at Insureon, the nation’s leading online small business insurance agency. Small businesses can find out what policies they need with Policy Buddy.
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