Disaster loans can be a useful tool when your business is impacted by the unexpected. In December 2018, it was announced that companies in Maryland could make applications for a low-interest disaster loan after a series of tornadoes. While many businesses have been quick to take advantage of this option, many others are still confused about what a small business administration (SBA) disaster loan is, and whether or not they are entitled to one. A disaster loan is not available for every business, but knowing that you are entitled to this form of credit can help you return to normality and provide the necessary cash advance to resume trading.
Disaster Loans – The Basics
At their core, disaster loans are intended to help businesses recover after being affected by a natural event that negatively impacts normal commercial activity. If your insurance does not cover wildfires, tornadoes, or floods, then a disaster loan can help make up for the losses that you incur. It can take a while for a disaster loan payment to come through, but they usually arrive in your account four weeks after your application. This is a very different experience for those who have gone through the SBA loan scheme for other reasons. However, if your business qualifies for a disaster loan, you may be entitled to up to $2million. There are three disaster loan programs available. They are:
- Business Physical Disaster Loans (BPDL) – These are available to businesses of any size, and are not restricted to just small businesses. A BPDL can help you to pay for real estate repairs or rebuilding, equipment financing and replacement, restock your inventory, and pay for lost businesses assets.
- Economic Injury Disaster Loans (EIDL) – More targeted at small businesses in the agriculture and aquaculture sectors, as well as non-profits and other small businesses. Religious organizations are not entitled to an EIDL.
- Military Economic Injury Disaster Loans (MEIDL) – If a member of your workforce is called to active service by the military and it has an adverse effect on your business, a MEIDL can help you to recover any lost costs and loss of expenses.
Disaster Loan Eligibility
Not every business is suitable for an SBA disaster loan. They are loans rather than grants, and so a strict set of criteria are in place to ensure that only those that need the loan agreement are eligible. A business of any size that has experienced some form of physical damage due to being in a qualified and declared disaster may be eligible. This is the most crucial factor for those in Maryland. Loans in these cases can be made up to a value of $2million. Recently, Bay County businesses made applications worth $363 million after Hurricane Michael, but many Maryland businesses have yet to make their applications. In a disaster, these loans can be essential for getting back to trading quickly.
Not every business is eligible for a disaster loan. Before you start your application, make sure that your business does not fall into the following categories:
- Publicly owned non-profit organizations/Public Entities – If you run a non-profit organization that is publicly owned, you will not be entitled to a disaster loan. While private non-profits are eligible, religious organizations remain excluded from these loans.
- Agricultural Enterprise – This can be quite a complex element of disaster loans. That’s because the SBA does not grant disaster loans to agricultural enterprises. However, there is some flexibility involved. If your enterprise has a separate function alongside the agriculture element, then loan relief may be possible for a cash advance. Talk to your local SBA office to make sure that you qualify for a loan before you start the process.
- Hobbies – With more people than ever before working from home and turning their hobby into a source of profit, it’s easy to assume that SBA disaster loans cover them. The SBA will have to determine that you are running a business rather than a hobby, and they will consider the legal status of a business, as well as any licensing that you have in place.
Qualifications for a Disaster Loan
As well as your business type, other factors will affect your eligibility for a disaster loan from the SBA. This is to make sure that you are going to be able to make your repayments. Those repayments are usually less demanding than traditional commercial loans. Make sure that you are aware of the following essentials:
- Credit Score – You are going to need a credit score of at least 660. Your credit report will be reviewed. If you have a credit history that involves bankruptcy, tax liens, foreclosures, or even previous issues with SBA loan repayments, then your application will be refused.
- Repayments – The SBA will want to make sure that you are going to be able to make your repayments. They will look at your company earnings and will be looking for an indication that your business profits will cover your loan repayments. It is not uncommon for all loan types, including an interest only business loan.
- Down Payments and Equity – These are not essential, but they can help your application. If the SBA is unsure of how much you need for your loan, then they may ask you to provide personal or business collateral that will cover the amount total of the loan. For businesses making an application over $25,000, collateral is going to be expected. Although not having the necessary collateral may not exclude you from being granted a loan, it could slow the process down considerably.
What can a Disaster Loan be used for?
You will not be able to use your disaster loan on anything that you want. These loans have been specifically designed to help businesses recover from disaster, and as such have restrictions in place regarding what the money can be spent on. You can spend your loan on:
- Real Estate
- Repairs to property
- Restocking your inventory
- Replacing lost or damaged machinery through industrial equipment financing
- Necessary supplies
- Physical business assets and company acquisitions
Because disaster loans are intended as a way to return to normal, they are not expected to be used as a way of expanding or upgrading your business model.
A disaster loan from the SBA can make all the difference to your future if you and your business has been hit by an unexpected disaster. Make sure that you know exactly what you’re entitled to, but get advice from the SBA. They can help guide you through the application process and ensure that you can start on the road to business recovery much more quickly.