When business owners think about getting a loan, their minds usually go straight to the numbers. Interest rates, payment schedules, cash flow. But there’s another piece of the financing puzzle that never gets enough attention: insurance requirements.
Whether your funding comes from a bank, an investor, the SBA, a leasing company, or even your own retirement account, insurance is a critical part of protecting the investment; theirs and yours.
Here is what every business owner needs to know before signing on the dotted line.
Lenders Want to Protect the Collateral, And So Should You
Anytime a lender provides financing, they want to make sure the collateral is covered. That collateral may be:
- Your building
- Your inventory
- Your equipment
- Your vehicles
- Your build-out for a new franchise or location
If any of those items are damaged or destroyed, the lender’s investment is at risk. That’s why nearly every financing agreement includes specific insurance requirements. These requirements can impact the limits you carry, the types of policies you need, and even where and how that coverage must be written.
And this isn’t only about major loans. Leasing companies for copy machines, phone systems, salon chairs, and specialized equipment often have their own requirements buried in the contract that owners don’t always read closely.
In other words, insurance plays a major role in nearly every business transaction that involves borrowed money.
The Risks of Waiting Until Closing
One of the biggest mistakes business owners make is assuming they can figure out the insurance later. Unfortunately, “later” usually means at the closing table, when the lender asks for proof of coverage.
If you discover at the last minute that:
- You need a type of policy you’ve never heard of,
- The required limits are more expensive than expected, or
- The policy simply isn’t available for your type of business…
…your entire deal can be delayed or fall apart entirely.
A real example: a bank once required a client to purchase pollution liability insurance, despite the business having no realistic pollution exposure. That policy was extremely costly and made no sense based on the risk. Thankfully, because we reviewed the loan documents early, we were able to negotiate it out before closing.
That kind of conversation is much easier before you’re sitting at the table waiting for a check.
“Self-Funding” Still Requires Protection
More people today use personal funds to launch or grow their businesses, including home equity loans, 401(k) withdrawals, or other private financing.
But here’s the part many forget:
If you’re funding the business, you are the lender.
And lenders should protect their investment. If you drain your retirement account or borrow against your home to build out a franchise, what happens if there’s a fire the week before opening? Or a theft? Or a burst pipe?
Without proper insurance, your loss is 100 percent yours. There is no bank to negotiate with, just a hard hit to your long-term financial security.
Whether the money is yours or someone else’s, the risk is the same. Coverage matters.
During the Term of the Loan, Avoid Lapses in Coverage
A lapse in coverage, whether accidental or intentional, creates a major problem for business owners.
First, insurance carriers often decline to write new policies for businesses that have been uninsured. A lapse makes you a higher-risk customer in their eyes.
Second, your lender may step in and buy coverage for you. This is called “force-placed insurance.” It is:
- Always more expensive
- Often more limited
- And sometimes even retroactively charged
Yes, retroactive. We’ve seen cases where a bank billed a client for a full year of coverage after discovering their expired policy, on top of requiring them to purchase a new policy immediately.
Now imagine that happening with a business loan or line of credit. It’s not something you want to experience.
Coverage Is Negotiable If You Ask Early
Not every requirement in your loan documents is set in stone. Many are boilerplate.
If something doesn’t make sense, like flood insurance for a second-floor office, or a high limit that far exceeds your actual replacement cost, your insurance broker can explain the risk and help negotiate more reasonable terms.
But timing is everything.
Raise these questions before the loan is finalized, not after.
Franchises Face Unique Financial Pressures
For franchises, insurance requirements play an even bigger role. Franchisees typically face:
- Franchise fees
- Six-figure build-outs
- Equipment purchases
- Brand-required construction specifications
Most of this is financed. Very few franchisees have the cash to self-fund an entire build-out. And because these costs are fresh and significant, protecting the investment becomes even more important.
Many new franchise owners don’t realize how much coverage they truly need until we walk through the numbers with them. By that point, the investment is personal. Insurance simply becomes smart planning. Check out our blog post that reviews all the insurance considerations for franchises.
The Bottom Line: What Do You Have to Lose?
When we work with clients, the real conversation isn’t only about bank requirements. It’s about understanding:
- What you’ve spent to get where you are
- What it would cost to rebuild or replace your assets
- How long you could survive without income if something shut you down
- Whether you could recoup the investment if disaster struck
The goal is simple:
Make sure your insurance actually protects the business you’ve worked so hard to build.
Lenders, investors, landlords, and leasing companies may dictate some of your coverage, but the foundation should come from understanding your own exposure.
Need Help Reviewing a Loan, Lease, or Insurance Requirement?
At Graf Insurance, we help business owners navigate these requirements every day. Whether you're expanding your operations, taking out a new line of credit, or launching a franchise, early communication between your insurance broker and your lender can save you stress, money, and last-minute surprises.
If you're preparing for financing, or if you're not sure your current coverage aligns with your obligations, we’re here to help you sort through the details.
