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When you’re applying for an SBA loan for your small business, the process can be intimidating, complicated—and frankly, a little scary. There are a lot of very specific, practically nitpicky requirements from the SBA that you as the borrower must meet. And at first glance, some of them might not even make sense.
One of those requirements is loss payee vs. lender’s loss payable endorsements. For an SBA loan, you’re required to designate the lender on your insurance policy as lender’s loss payable or loss payee—and aren’t those the same thing?
They’re not. You might think that loss payee and lender’s loss payable are just variations on the same term. But there’s a big difference, and for SBA loan applicants, it’s very important to understand which is which before submitting your SBA loan application.
The terms sound similar, but the definitions are very different. It’s okay to be confused at first—entirely candidly, even many insurance agents are confused by the subtle difference between these two similar-sounding terms.
We’ll explain the difference between loss payee and lender’s loss payable, and why it’s important to get it right. That way, you can make certain your SBA loan application process is smooth sailing—and worry about how you’ll be using your small business loan, not getting the silly details right.
The difference between loss payee and lender’s loss payable endorsements is all about the amount of protection your lender will receive from your property insurance. Lender’s loss payable is an endorsement statement attached to your insurance policy and affords your lender certain protections in the event that the loan is defaulted on or cancelled due to negligence by the insured.
Loss payee affords very minimal protection to the lender. So, if the borrower defaults or misuses funds to make the loan void, the lender receives no payments. The lender has the same protection under loss payee as the borrower.
None of this will have any effect on you personally or your business, but the Small Business Administration (SBA) is very particular about getting this right for your SBA loan application.
Think of it this way: Lender’s loss payable equals payment to the lender, no matter what happens to an insurance policy.
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. As you might imagine, then, the designation lender’s loss payable affords the lender (in this case, the SBA and their lending partner) many more protections than loss payee.
One of the reasons that the SBA requires the designation lender’s loss payable is so that they have more protection and ability to collect on a loan in case of borrower default. This lowers the risk taken on by the SBA—and, of course, lenders are always looking to mitigate risk.
The protections afforded to the lender with the designation lender’s loss payable include:
As you can see, lender’s loss payable offers the lender a lot of protections and ability to collect upon an insurance policy, even if the policy gets cut short due to the negligence of the borrower or insured.
Important: The lender can collect on an insurance policy even if you as the borrower can’t. This makes a lot of difference to the lender but probably very little difference to you as the borrower. It means that borrower negligence on the insurance policy cannot affect the payout to the lender.
All of these protections greatly reduce the risk for the lender and allow them to collect on an insurance policy agreement that’s gone bad. They’ll be able to recoup some of the funds that they’re out, having loaned them to the borrower.
Now that we’ve explained lender’s loss payable endorsements, and how the lender is protected in case of borrower default or fund misuse, you’ll understand why loss payee endorsements just won’t work for the SBA. Like we mentioned before, with loss payee vs. lender’s loss endorsements, the lender and the borrower have the same protections.
For the SBA, that’s not enough.
Unfortunately for you, most insurance agents automatically choose loss payee when providing a designation to lenders. This won’t fly 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.
→TL;DR (Too Long; Didn’t Read): Lender’s loss payable endorsements set up the lender with the ability to collect on your insurance even if you can’t. Loss payee means that they have the same protections as you. The SBA requires you to have the former, and won’t accept the latter.
For SBA loans—which is what we’re talking about here—the loss payee vs. lender’s loss payable endorsements designation is specifically reserved for loans that use personal property for small business loan collateral. Personal property can include business equipment, machinery, and anything other than real property. The business property must be valued at over $10,000, says Melissa Ng, an SBA loans specialist at Fundera.
Because the 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 cancelled or voided for some reason.
Again, we’re only chatting about SBA loans here, which require the designation of lender’s loss payable. Other lenders might require this designation, but the most common time that borrowers see this requirement is when working with the SBA.
One of the reasons you’re always hearing about SBA loans is because they’re truly some of the best loans on the market. SBA loans offer borrowers long-term repayment periods and low interest rates. Both of which make SBA loans highly desirable to borrowers. (The SBA has even just added a new 25-year term for SBA 504 loans, which is great for borrowers.)
Because SBA loans are sought after so fervently, they can have very specific and strict requirements for borrowers. One of the requirements set out by the SBA is that the borrower must designate the SBA lender’s loss payable on the insurance policy that covers any personal property used as collateral to secure the loan.
The lender’s loss payable clause affords the lender—the SBA and their intermediary lending partner in this case, since the money doesn’t come from the SBA directly—to collect on an insurance policy even when that policy is terminated due to the fault of the borrower or insured.
Why is that important? The SBA (and all other lenders) are always looking to lower their risk. The major question in their mind is: Will I get my money back?
One of many ways that the lender increases the likelihood that they’ll get their money back is by requiring the lender’s loss payable designation on an insurance policy for property used as collateral.
→TL;DR: Since the SBA is always trying to mitigate risk, especially on these highly desirable SBA loans, they require you to choose the endorsement that gives them the chance to recoup the most losses in case you default. You need to use the lender’s loss payable endorsement for personal collateral upwards of $10,000.
To obtain the lender’s loss payable designation, you need to contact the agency that insures the property you’re using as collateral on your SBA loan.
The insurance agency is the only one that can make the lender’s loss payable designation on your insurance policy. This is the same for a loss payee designation, but that’s not the designation required by the SBA.
Most insurance policies will happily include a designation for your lender, but Ng, Fundera’s SBA loans specialist, says that most will automatically choose the designation loss payee. It’s also not uncommon that insurers are even confused about the specific difference between the two designations.
Because some insurance agents don’t know the difference between lender’s loss payable and loss payee, we want to make sure that you understand the difference and know what to ask for from your insurance agent.
Once you’ve requested that the lender’s loss payable designation is added to your policy, it’s important to request a new copy of your policy that proves the designation is added. This is an important step because the SBA will ask to see it, but also for you to personally make sure the right designation has been added.
Remember: Lender’s loss payable!
Without the lender’s loss payable designation, you won’t be able to receive full approval for your SBA loan.
→TL;DR: Your insurance company can switch the status of your endorsement for you.
The actual designation of lender’s loss payable will have no effect on your business. The only entity affected by the lender’s loss payable designation is the lender, who can now receive payment from the insurance policy, even if you as the borrower don’t.
The effect that your business might feel is simply the added requirement of asking for and receiving the lender’s loss payable designation. Because of the general confusion over the difference between loss payee vs. lender’s loss payable endorsements, you might have some trouble convincing the insurance agent that the change is necessary. Sometimes, that’s just part of owning a small business. (And you’ve jumped through hoops before.)
Although this is a requirement to receive an SBA loan, it’s not a part of your initial SBA loan application. You’ll want 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. (Before you submit the application to the SBA, you can also let a loan specialist it over and offer tips or a pre-approval.)
Once that application has been approved, then you can start to add the lender’s loss payable designation to your insurance policy. Remember, a lender’s loss payable designation is only required for:
Before final approval, the bank will make sure that everything in your SBA loan application meets the guidelines set out by the SBA.
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. That’s okay–and, quite honestly, likely! It’s rare for a lender to require an insurance policy to include a lender’s loss payable designation.
Because SBA loans are considered the gold standard of loans on the market, they can (and do) set strict requirements for approval. A designation for lender’s loss payable happens to be one of the strictest requirements that the SBA asks borrowers to meet before approving them for an SBA loan.
→TL;DR: This isn’t part of your loan application—only something you need to get your loan approved.
Though the words are extremely similar, there’s a major difference between loss payee vs. lender’s loss payable endorsements. It’s important for borrowers who are applying for an SBA loan to understand the difference between the two terms, as the SBA requires the designation of lender’s loss payable for all borrowers using business property valued over $10,000 as collateral.
SBA loans are easily the best loans on the market, but it’s important for borrowers to make sure they meet all requirements set out by the SBA so that they qualify for these amazing business loans. Once you know the difference between these two, you’ll be on the way to getting your SBA loan paperwork in the best shape possible.