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The term loss payee refers to a clause that is added to insurance policies when you use collateral to secure a loan. The lender will require that the collateral you use is insured and that they are listed as the “loss payee”—meaning that in the case of a covered loss on the collateral, both you, as the insured, and the lender, as the loss payee, will receive payment. A loss payee is different from lender’s loss payable in that the latter guarantees the lender payment no matter what happens to the insurance policy.
When you’re applying for a small business loan, especially an SBA loan, the process can be intimidating, complicated, and a little overwhelming. With SBA loans, in particular, there are a number of very specific, extremely nuanced requirements that you—as the borrower—must meet. One of these requirements is the lender’s loss payable endorsement, in which you’re required to designate the lender on your collateral insurance policy as lender’s loss payable—as opposed to simply loss payee.
If you’re wondering what the difference is between a loss payee and lender’s loss payable, you’re not alone. Although it seems like these two phrases could be variations on the same term, they are different—and it’s important to understand which is which before you apply for an SBA loan.
We’re here to help. In this guide, we’ll answer “what is a loss payee” and explain the difference between a loss payee and a lender’s loss payable. Finally, we’ll break down everything you need to know about the lender’s loss payable endorsement and how it relates to the SBA loan application process.
First, let’s start out with the basics. What is a loss payee?
On the whole, a loss payee refers to a clause that’s added to an insurance policy when you use collateral to secure a loan. The lender who is providing the loan will require that the collateral you use is insured and that the corresponding policy designates them as the “loss payee.” With this designation, in the case of a covered loss on the collateral, you and the lender would both receive payment. Essentially then, the loss payee designation protects the lender—ensuring that they’ll be paid for the collateral, regardless of potential losses.
Let’s explain further:
Say you’re taking out a secured business loan from Lender A and putting up your car as collateral. In this case, Lender A will require you to have an insurance policy on that vehicle and that on the policy, they’re listed as the loss payee. If something happens to your car and the insurance company pays you for the damages, Lender A will also be paid.
Ultimately, the loss payee designation serves to protect the lender and reduce unpaid loans. Generally, if you’re applying for a loan and putting up collateral, the lender will require your insurance policy to list them as the loss payee. If you don’t comply with this requirement, the lender may put force-placed insurance on your collateral.
Now that we have this loss payee definition in mind, let’s continue by discussing the difference between a loss payee and lender’s loss payable.
In essence, the core difference between a loss payee and lender’s loss payable is the amount of protection your lender will receive from your collateral insurance. A lender’s loss payable endorsement on your insurance policy affords your lender certain protections in the event that you default on your loan—or if your insurance policy is canceled due to negligence—meaning you violated the policy in some way and the insurance company canceled it.
With a loss payee endorsement, on the other hand, the lender only receives minimal protection. If you default on your loan or misuse funds to make the loan or insurance policy void, the lender receives no payments. In this case, the lender has the same protection as a loss payee as you do.
So—why is this difference important? Although these two designations will not have any day-to-day effect on you, personally, or your business, the distinction between a loss payee and lender’s loss payable becomes extremely important when it comes to SBA loan requirements.
Ultimately, you can think of the difference between a loss payee and lender’s loss payable this way: Lender’s loss payable equals payment to the lender, no matter what happens to an insurance policy.
As we mentioned, this is particularly significant for SBA loan applicants because the SBA requires that all approved SBA loan applicants must designate lender’s loss payable on their insurance policy when their business property is used as collateral for the loan. With this lender’s loss payable designation then, the lender (in this case, the SBA and their lending partner) will have many more protections than they would with a simple loss payee designation.
This being said, one of the reasons that the SBA requires a lender’s loss payable endorsement is so they have more protection and the ability to collect if you default on your SBA loan. Therefore, this endorsement lowers the risk taken on by the SBA—and, of course, lenders are always looking to mitigate risk.
Getting into the more specific details, when you designate your lender as lender’s loss payable—the lender, so in this case, the SBA, would be afforded the following protections:
As you can see, lender’s loss payable offers the lender substantial protection and ability to collect upon an insurance policy, even if the policy gets cut short due to the negligence of the borrower or insured. It’s important to remember here that the lender can collect on an insurance policy—even if you, as the borrower, can’t.
Now that we’ve explained lender’s loss payable endorsements in greater detail as well as how the lender is protected in case of borrower default or fund misuse, you should have a better sense of why a loss payee endorsement won’t suffice for an SBA loan. As we mentioned earlier, with a loss payee endorsement, the lender and the borrower have the same protections, which simply isn’t enough for the SBA.
With this in mind, it’s important to note that most insurance agents automatically choose loss payee when providing a designation to lenders. Therefore, if you’re borrowing from the SBA, you’ll need to make sure that the insurance agent submits a designation of lender’s loss payable instead.
Now, in most cases, when you’re applying for a small business loan with collateral, a loss payee endorsement on your insurance policy will suffice. However, when it comes to SBA loans, the lender’s loss payable endorsement is specifically reserved for loans that use personal property (valued at over $5,000) as collateral. In this case, personal property can include business equipment, machinery, and anything other than real property (land and buildings).
Once again, in this situation, since property is being used as collateral for the loan, the lender’s loss payable designation is important so that the lender doesn’t risk losing their collateral if your insurance policy is canceled or voided for some reason.
Although this requirement is most commonly seen when working with the SBA, you might also see other lenders who require this designation as well.
So, why is this endorsement so important for an SBA loan application? Well, one of the reasons you’re always hearing about SBA loans is because they’re truly some of the best loans on the market—offering borrowers long-term repayment periods and low interest rates.
However, because SBA loans are sought after so fervently, they have the ability to enact very specific and strict requirements for borrowers. Therefore, if you’re applying for an SBA loan and are using personal property as collateral, the SBA is able to require you to designate lender’s loss payable on your insurance policy.
In this case, a lender’s loss payable endorsement protects the SBA and their intermediary lending partner and lowers the risk associated with granting the loan. This being said, with the competitiveness of the SBA loan programs, if you fail to meet this requirement, the SBA can easily reject your application. If you want the opportunity to receive one of the best loans on the market, then, you’ll need to meet each of the SBA requirements exactly—and this includes the lender’s loss payable endorsement.
With all of this being said, you’ll need to be sure to get a lender’s loss payable endorsement if you’re applying for an SBA loan and using personal property as collateral. To obtain this designation, you’ll need to contact the agency that insures the property you’re using as collateral on your loan. The insurance agency is the only one that can make the lender’s loss payable designation on your insurance policy.
Likewise, the insurance agency is the only one who can designate a loss payee as well, although this is not the designation required by the SBA. As we mentioned earlier, most insurance agencies will designate loss payee automatically when you’re taking out a policy on collateral to secure a loan.
Once you’ve requested to add the lender’s loss payable endorsement to your policy, you’ll need to request a new copy of your policy to prove that the designation has been added. This is important not only because you’ll need to show the policy to the SBA, but also because it gives you the opportunity to make sure the right designation has been added.
As we mentioned above, without the lender’s loss payable designation, you won’t be able to receive full approval for your SBA loan.
Ultimately, either the designation of loss payee or lender’s loss payable will have no actual effect on your business. The only entity affected by the loss payee or lender’s loss payable designation is the lender—and in the case of the lender’s loss payable endorsement, the lender can then receive payment from the insurance policy, even if you, as the borrower, can’t.
The only way this designation will affect your business, then, is that you’ll need to reach out to your insurance agency to ask for the lender’s loss payable designation if you’re applying for an SBA loan with personal property collateral.
As we’ve emphasized, the lender’s loss endorsement is a requirement associated with SBA loans that include personal property as collateral. However, it’s important to note that although this is a requirement, it’s not part of your initial SBA loan application.
You’ll need to put together your original SBA loan application with a local lender or bank that will act as your intermediary lender on the SBA loan. Once that application has been approved, then you can add the lender’s loss payable designation to your insurance policy.
Before final approval, the bank or local lender will make sure that everything in your SBA loan application meets the guidelines set out by the SBA.
It’s also important to remember that the lender’s loss payable endorsement is a relatively rare requirement. It’s very likely that even if you’ve applied for and received a business loan in the past, you’ve never heard of the lender’s loss payable designation.
However, because SBA loans are considered the gold standard of business loans on the market, they can (and do) set strict requirements for approval.
At the end of the day, although the phrases are extremely similar, it’s important to remember the difference between loss payee and lender’s loss payable endorsements. This difference is even more significant if you’re applying for an SBA loan—as you’ll need an insurance policy on the business property you’re using as collateral that has the lender’s loss payable designation.
As we’ve mentioned, SBA loans are easily the best type of business loan on the market—and although they have strict requirements, like this one—you’ll want to be sure you meet all the requirements to qualify and then you’ll be on your way to growing your small business.
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