One of the biggest challenges a small business can face is recovering from a natural disaster. Natural disasters can bring otherwise healthy businesses to the brink of bankruptcy in just a matter of days, jeopardizing the hard work so many individuals have put into building a sustainable company. The recent wildfires – some of which are still ongoing – in California and other western states are no different. In addition to costing Americans their lives and belongings, they have also destroyed the work of thousands of small business owners.
As such, wildfire recovery efforts have become critical. Yet, when most people think of disaster assistance, they think of loans to help homeowners and local communities pitching in with debris removal. However, there are also several important resources that small business owners can use in their disaster recovery efforts. These programs provide financial assistance, business counseling, and other technical assistance to both small businesses and private nonprofits that have been impacted by a natural disaster.
In this article, we’ll discuss some of the wildfire relief options for small businesses and detail how small businesses owners in declared disasters areas can obtain the assistance they need as disaster survivors.
Small Business Administration (SBA) Loans
The United States Small Business Administration (SBA) orchestrates the federal disaster response for the US federal government. They offer two key disaster assistance programs as well as various support programs designed to counsel small businesses in their recovery efforts.
As a result of President Biden’s major disaster declaration for areas impact by wildfires, the SBA is now working to assist small businesses in these impacted areas. Isabella Casillas Guzman, an administrator of the SBA, noted recently that the “SBA is strongly committed to providing California with the most effective and customer-focused response possible and with access to federal disaster loans to help businesses and residents affected by this disaster. Getting our business and communities up and running after a disaster is our highest priority at SBA.” You can visit FEMA’s website to search and see if your area falls into this category.
Part of the SBA’s response to the wildfires includes offering a new Virtual Business Recovery Center as of August 26th. This center is designed to provide personalized assistance to small business owners and can answer questions in relation to the specific needs of your small business. This can be helpful for small businesses looking to gain more detailed information on how loans might apply to their business specifically as opposed to the more generalized information here – which is designed to provide a starting place for small businesses who are looking to learn about what disaster recovery resources are available to them. Individuals staffing the recovery center will be able to answer questions about the various SBA loan programs, explain the nuances of the application process, and assist small business owners in filling out and filing an electronic loan application. The Virtual Business Recovery Center’s information is as follows:
Virtual Business Recovery Center and Virtual Disaster Loan Outreach Center
Monday to Friday, 8 a.m. to 8 p.m. ET
We’ll now discuss the two main loan types that the SBA offers for disaster recovery.
Economic Injury Disaster Loans (EIDL)
The SBA’s economic injury disaster loans (EIDL) are part of their keystone program for disaster recovery assistance. These loans are designed for small business and nonprofit organizations that are unable to obtain credit elsewhere on account of their business history and track record.
EIDL loans can provide small businesses with up to $2 million in funding. They are specifically designed to assist small businesses in meeting their financial obligations and other operating expenses that they would have been able to cover if the natural disaster had never taken place. As part of this, the funds can be used for things like fixed debt payments, healthcare benefits, utilities, rent, working capital, and other normal expenses that you would expect to incur while operating your business.
Interest rates of EIDL loans do not exceed 4% and they have maturity dates of up to 30 years, making them a very flexible loan option for small businesses. Additionally, there are no pre-payment penalties or fees associated with the loans. This allows small businesses to pay them back whenever they are comfortable doing so.
It is important to emphasize that EIDL loans are not designed for use in covering repairs to damaged property. Disaster loan assistance for property damage is also offered by the SBA, and we’ll cover those loans next.
EIDL loans are a really great option for small businesses in disaster areas. Not only are they great for smoothing out cash flow and covering losses in revenue caused by the aftermath of a natural disaster but they are also good for the general public’s recovery. Many businesses struggle to pay employees after a natural disaster that impacts cash flow – taking out an EIDL loan can help you continue to pay your employees. Considering your employees were most likely also impacted by the wildfires in some way, this can serve as a real financial lifeline for them.
Please note that before applying for an SBA Disaster Loan, you must first register with the Federal Emergency Management Agency (FEMA) as having been impacted by the natural disaster. EIDL loans exceeding $25,000 in total also require small business owners to put down some form of collateral, while loans exceeding $200,000 require a personal guarantee. Remember to consider taking out a loan with a personal guarantee carefully. Giving a personal guarantee on a loan will put your own personal finances and assets in jeopardy should the business default.
You can apply for an EIDL loan conveniently online. Once you have completed and submitted your application, the SBA will send out an inspector who will be able to estimate the cost of the damage to your business and assess your eligibility for an EIDL loan.
SBA Physical Disaster Loans
Fire recovery can be difficult because it often doesn’t leave any salvageable property behind. This can make the property damage immense. Fortunately, the SBA also offers another type of loan designed specifically for physical property damage. In particular, SBA physical disaster loans are meant to cover any property-related disaster losses that are not covered by your business’ insurance provider and policy. Nonprofits are also eligible to take advantage of these loans.
A few examples of what these loans can be used on include real property, equipment, machinery, inventory, leasehold payments, fixtures, furniture, and just about any other form of physical property you can think of. Anything that your insurance did not cover you can use an SBA physical disaster loan to supplement.
Please note that these funds cannot be used for any upgrading or expansion work that your business wants to take on. The funds can only be used for upgrading your worksite if you are updating the building to meet new building codes.
That said, your business can apply for mitigation assistance. The SBA’s mitigation assistance program is designed to provide funds to small businesses so that they can increase their preparedness for future natural disasters. Funds acquired through a mitigation assistance application can be used to make any improvements that will help reduce the risk of future property damage in the event that a similar natural disaster takes place. If your business requests mitigation assistance and is approved, your loan can be increased by up to 20% of the initial loan amount your business is eligible for based on the SBA’s determination.
If you think your business would benefit from mitigation-oriented upgrades, now may be a good time to begin the process. Disaster loan assistance provided by the SBA is well-organized and the loans typically have strong interest rates and long terms, making them a good source of funds for small businesses. Such loan terms may not present themselves for your business again in the near future, so if you think your business would benefit from these kinds of upgrades, now may be the time to start thinking about them seriously.
Remember, the SBA considers itself a “lender of last resort” for the most part. This means that they typically want you to seek outside funding first before turning to them. As a result, the maximum interest rate for physical disasters loans is higher for businesses that are able to obtain credit elsewhere. They are subjected to a maximum interest of 8%. Small businesses that cannot obtain credit elsewhere have a maximum interest rate of 4% on their loans. The SBA determines internally whether or not your business is eligible to receive loans elsewhere.
State and Local Assistance
Whenever a natural disaster impacts a state, the state government and local governments typically respond with assistance programs and various means of support for small business owners. State and local governments understand how important small businesses are to local economies, and they understand that making sure small businesses can get back on their feet statewide is a critical aspect of the road to recovery.
California, for example, has an entire website dedicated to helping individuals across the state learn about what recovery assistance and programs are available to them.
While individuals often think about the federal government and their state government as the first resources for disaster assistance, don’t forget about your local government and surrounding municipalities. They also tend to offer resources for small businesses impacted by natural disasters, and it is not uncommon for them to set up funds to assist local small businesses and community members in getting back on their feet. In many cases, the money you receive from these funds – while typically being small in amount – does not have to be repaid. We highly recommend that you consider contacting your local Chamber of Commerce or a similar local institution to learn about any forms of local assistance and support that may be available to you as a small business owner. Navigating the recovery process is not easy, so you want to make sure you take advantage of all the help available to you.
Local charity organizations and nonprofits are also great resources for disaster recovery assistance. Typically, local organizations will be working overtime to help their community recover, and oftentimes this includes setting up funds and providing hands-on labor and assistance in the rebuilding process. If your business was relatively unaffected by the disaster, you might also consider donating to or assisting these organizations in their efforts. Not only is this the right thing to do but you will also be building a good rapport and reputation with your local community – something that is not only important from a humanitarian perspective but a business perspective as well. People won’t forget who was there in their time of need.
Traditional Loans and Alternative Lenders
Small business owners can also obtain loans for disaster recovery from traditional and alternative lenders. While these loans won’t be subsidized or given any special terms on account of being used for disaster recovery, they can still provide a critical financial lifeline for your small business.
Traditional loans from brick-and-mortar lenders tend to be reserved for small businesses with a strong and successful operational track record. If your business has a good credit score and falls under this category, getting a traditional loan shouldn’t be too much of a problem. Interest rates are still quite low right now as we exit the pandemic, so favorable terms are still available as well.
If your business doesn’t have top-notch credentials and an impeccable track record, alternative lenders are a resource you can consider. Alternative lenders are not banks and are therefore not subject to the same level of scrutiny and regulation, which allows them to make riskier loans and provide credit to borrowers who would otherwise be unable to obtain any.
Please note that the interest rates offered by alternative lenders will be higher than you would find elsewhere in order to compensate for the additional risk they are taking on, so this is something you will want to consider during the loan application process. Additionally, the terms tend to be shorter. That said, alternative lenders can provide a myriad of financial products including lines of credit, term loans, working capital solutions, and more. So, they can be a great resource for businesses that need timely access to cash flow.
As part of the federal government’s emergency response to the wildfires, the Internal Revenue Service (IRS) has announced a tax relief program for the victims. As part of this, the victims have been given an extension on their tax return deadlines, giving them more time to get their financial affairs in order. The state of California also announced certain tax relief measures as well for individuals impacted by the wildfires.
Don’t Forget About Personal Care and Recovery
We understand that as a small business owner you may be particularly focused on resurrecting your business. However, don’t forget about the disaster relief and assistance available to you as an individual as well. Many programs and organizations, such as the Federal Emergency Management Agency (FEMA) are there to assist you and your family with the recovery process, both in terms of financial and mental health. Going through a natural disaster is serious, and you will only be able to support your small business in getting back on its feet if you first take care of your personal situation. So, be sure to look into the public assistance available for families and homeowners recovering from the wildfires.
Recovering from a natural disaster can be an incredibly difficult and challenging task. Even more, it can be emotional. After having worked hard for years or decades to build a small business, to see it in ruins after a natural disaster is understandably devastating. Fortunately, there are many resources available for small business owners impacted by natural disasters. So, please be sure to do your research and understand all the programs out there that are eager to assist and support your small business. You are not alone in the recovery struggle, so use the federal, state, and local resources available to you. By doing so, you can ensure your business will be able to get back on its feet and achieve even greater levels of success in the future.
At Biz2Credit, we work tirelessly to bring our readers the latest up-to-date information on the current trends and happenings in the thousands of small business communities across the United States. Given the ongoing pandemic and the natural disasters that so many small businesses across the nation have faced recently, we realize that this work has never been more important than it is now. So, please be sure to keep checking back here at our Biz2Credit Blog for the latest information and news.