When to Consider SBA Disaster Recovery Loans
You live in an area that has been declared a disaster area by presidential decree after a major hurricane. Your community has been hit hard and your small business has been impacted. What should you do? SBA Disaster Recovery Loans should be top of mind.
The Small Business Administration has disaster recovery loans that are available to the business owner in the aftermath of a weather disaster. These loans are low-interest, fixed-rate, long-term loans meant to cover uninsured or underinsured losses. And, these loans are available to businesses of all sizes. This sounds great, right? It can be. But, there are pros and cons of SBA Disaster Recovery Loans for your small business. And you need to evaluate if this option is best for your business when you’re climbing your way out of a disaster.
What exactly is a disaster recovery loan?
When hurricanes, tornadoes, earthquakes or other natural disasters strike, your business can be crushed by physical and economic damages. The Small Business Administration (SBA) offers loans to assist businesses with the losses incurred by these major weather events. These loans are meant to help businesses and stimulate the economy in hard hit areas after a natural disaster.
The SBA offers direct loans that are low interest and payable over up to a 30-year term. Up to $2,000,000 in funding is available for qualified businesses. These loans are available to restore the business to pre-disaster condition and to replace physical property damaged by the weather disaster. SBA disaster loans also include coverage of losses of inventory, supplies, machinery and equipment as well as other physical losses. You also may have the option of mitigation loans available to you. These mitigation loans are meant for upgrades specifically to protect the business property against future damage due to floods, utilities, tornadoes and earthquakes. Examples include upgrades to businesses’ parking, raising up small structures, relocating equipment or restoring access to utilities.
Another type of loan available to business after a natural disaster is an Economic Injury Disaster Loan (EIDL). When major weather events happen, the impact is not only on the physical structures of your business, but also on the economics of your business.
Economic Injury Disaster Loans are available to businesses that are in a declared disaster area and suffer economic damage irrespective of physical damage. This loan is a working capital loan and it is meant to finance everyday operations of the company – not to replace physical property or to repair damage. In order for this type of loan to be available, at least 5 businesses in the area must have suffered significant economic injury from a major weather event. The goal of this loan is to stabilize the local economy by protecting jobs in the aftermath.
What are the benefits to your business?
SBA loans are relatively easy to apply for either online, in person or via email. The SBA processes loan applications in up to 4 weeks and will disperse the initial $25,000 within 5 days of closing. And you have 60 days from the day the disaster was declared to apply for this loan. If you are interested in an economic injury disaster loan, you have 9 months from the day the disaster has been declared.
SBA disaster loans are affordable. These loans are guaranteed at a 4-8% interest rate. Generally you can get a loan with an interest rate of 6%. In some cases, if your business has other sources of credit or grants available, the interest rate will not exceed 8%. The specific terms of the loans are determined on a case-by-case basis. And the SBA sets different rates for each disaster.
Most loans have a 30-year term if credit is not available elsewhere with an initial 5- to 15-month payment deferral. And finally, there are no closing fees for SBA loans.
What are the “cons” to this type of loan?
There are things to consider before deciding on an SBA disaster loan. The first thing to remember is that it is only eligible for declared disasters. Specifically, there needs to be a Presidential Declaration, Agency Declaration, Governor’s Certification or, Secretary of Agriculture or Secretary of Commerce disaster declaration for these loans to become available.
There are also certain requirements that your business must meet in order to qualify for an SBA loan. The loan officer reviewing your application is looking for a few specifics. First they look at your credit score. They are looking for a score of 660 or higher as well as your business’s ability to repay the loan. Your company’s earnings must be able to cover all loans and business expenses plus more.
Another consideration is the time it takes for loan approval. It can take up to 4 weeks for approval. You may be able to get funds more quickly through a traditional bank loan.
Another thing to keep in mind: unlike grants or other forms of disaster assistance, an SBA disaster loan is a loan, and you have to pay it back. For the most part, loans larger than $25,000 require collateral. While the SBA will not deny you for lack of collateral, they will require you to provide whatever collateral that you have available. Especially in cases of an economic injury loan, this can prove to be risky.
The SBA estimates that 40% of businesses never reopen their doors after a disaster strikes. If your business is like these unlucky ones and you default on your payments, the lender has the right to foreclose on the property used for collateral.
Finally, if you were thinking this was a good time to expand and planning to use your SBA loan for that purpose, you cant. The SBA loans are very specific. They can only be used for replacing or fixing property damaged by the weather event, not for upgrades to the property.
Recovering Strong with Disaster Recovery Loans
In summary, your best bet is to evaluate all of your funding options whether those are loans, grants or other kinds of financing available to you. If you have are an established business with a solid credit rating, you may choose to go to your bank for a traditional bank loan. And remember, if the SBA finds that you can get credit somewhere else, you may not be eligible for specific kinds of loans or they may charge you a higher rate of interest. There’s one principle that you can always count on in these times of stress: always do what makes the most sense for your business long-term.