SBA Disaster Recovery Loans

Updated October 5, 2020

Mother Nature is certainly a force to be reckoned with, and we’ve all seen the extent of the damage her wrath can cause. From major disasters like hurricanes, tornadoes, and floods, to lightning damage, wildfires, and more, the list of disasters that could threaten a business goes on and on…but does the funding to help businesses following a major disaster, or are you on your own?

Most businesses will have insurance policies, and, in most cases, an “act of nature” is a broad term that applies to certain natural disasters in the policy terms. However, businesses often find that in the wake of major disasters, all manner of red tape, new terms, and fine print materialize, often leading to minimum payments or no payments at all on behalf of the insurance company.

Some businesses look to SBA Disaster Recovery Loans instead to recoup the cost of their devastated organization. Of course, like any funding, such loans carry risks and benefits that every business owner should be aware of before applying. Let’s look at some of these pros and cons so you can make a better decision when it comes to borrowing money on behalf of your business.

What Exactly Is It and Who Qualifies?

A disaster recovery loan from the SBA is a low-interest, fixed-rate long-term loan. This funding is provided in order to assist you in recovering the costs associated with damage from natural disasters. The loans serve a two-fold purpose: to help businesses affected by disasters and to stimulate the economy in those disaster locations once the disaster has run its course.

Rebuilding communities starts with providing jobs and goods and services, which is why the loans have such excellent terms. A disaster loan will usually carry a term of about 30 years, and qualifying businesses can acquire up to $2,000,000 in funding. In some cases, a mitigation loan is offered, which can be used to upgrade the business to protect against future disasters. These upgrades can safeguard the business against flooding, fire, and more, and keep your business afloat even when the community around it is under siege.

Economic Injury Disaster Loan

This is another kind of loan available to businesses from the SBA following a disaster. An EID loan isn’t meant to help repair facilities, replace inventory, or upgrade your physical location. Instead, you’ll use it to recover everyday operating costs. This working capital loan will help you pay employees, utilities, and more.

There are some strict requirements in order to qualify, however. At least five other businesses in the area must also have suffered “significant economic injury” from the natural disaster as well.

How to Apply And Terms

Applying for a disaster loan is easy with online tools at In order to apply, you must request assistance within the 60-day period following the onset of the disaster. It can take up to four weeks for the SBA to process a disaster loan, but once you’re approved, your initial loan amount of $25,000 is usually dispersed within five business days.

Should you opt for an EID loan, you have up to 90 days from the date the disaster was declared to apply. These terms are set in place to ensure that everyone has fair and equal access to the opportunities and that the system isn’t abused.

The Pros of Disaster Recovery Loans

Now let’s dive into some of the pros of SBA Disaster Recovery Loans.

It’s Relatively Affordable

One of the pros of these loans is their affordability. Regardless of your business’s credit standing, the loans are usually guaranteed at a 4-8% interest rate, which is about as good as you can get with borrowing. Obviously, the specifics of your loan terms will be determined with your lender, but you shouldn’t have an interest rate of over 8% with disaster loans.

Additionally, your loan’s rates and terms can be affected by the type of disaster you’ve experienced. Some disasters bring greater devastation than others, and while any disaster is a risk to life, limb, and the health of your business, not every disaster leaves entire neighborhoods and cities leveled.

No Closing Fees, Flexible Repayment Term, and Initial Deferment

These loans also have no closing fees, so you won’t have to worry about incurring extra costs to borrow money. With a flexible 30-year repayment plan and an initial deferment period of about 5 to 15 months, you can get your business back up and running before you ever have to make a payment.

This is perfect for businesses that have been especially devastated by hurricanes, tornadoes, or wildfires. These disasters often level entire neighborhoods, if not towns and cities, making it difficult to rebuild in the aftermath without the proper funding.

The Cons of Disaster Recovery Loans

Now, it’s time to take a closer look at some of the more concerning features of disaster recovery loans. Ideally, your business will never need to seek such funding, but Mother Nature isn’t exactly the most predictable force on Earth. Anything can happen at any time, and you’ll need to be ready for the aftermath as well as the onset.

A Declared Disaster

Perhaps the most important component of disaster recovery loans is that they only apply to areas that have been officially declared (by the president, governor, or other governing body/agency with the authority to do so) as “disaster areas”. Areas that do not meet these specific criteria will not be eligible for such funding.

For a list of areas with declared disasters, you can use this FEMA tool to look up your area.

You’re Not Automatically Eligible

Unfortunately, just being the victim of a declared disaster does not guarantee your business relief funding. Your application will still come under the review of a loan officer, who will look for certain criteria to ensure that your business is a worthy borrower. It’s important to remember that this isn’t “free money”. A lender is still taking a risk by allowing you to borrow money, especially since your business has just been brought to a halt by a disaster.

That being said, you’ll need to expect certain conditions to apply. Your credit score will be considered, and a recommended score of 660 or higher is the minimum. This ensures that the lender isn’t lending money to businesses that do not maintain their financial integrity.

Your business also needs to be able to show that it was bringing in revenue prior to the disaster. It’s unlikely that a business that was already sinking will receive aid from the SBA following a disaster.

It’s Not Instantaneous

Don’t assume that you’ll have your funds right away if you’re approved. Imagine the hundreds if not thousands of businesses that are likely applying for funding in the wake of a disaster—it will take some time to process your application. As previously mentioned, this could be up to four weeks just to process your application and get you approved (or denied).

In some cases, a personal bank loan is actually the quicker route, but remember that these disaster loans offer very reasonable terms should you qualify. Weigh your options carefully, as your next move could determine the future of your business in the wake of the disaster. An estimated 40% of businesses never reopen following a major disaster!

It’s Still A Loan

Remember that you’re borrowing money. This isn’t a government grant to help you recover, unfortunately. That means you’re responsible for paying the loan back in full, and for any collateral that may be required by the lender to secure your financing. In most cases, a loan of over $25,000 will require some form of collateral.

Lenders are taking a huge risk by lending to businesses who’ve been affected by natural disasters, so naturally, they’ll want to protect the investment somehow. If you don’t have any collateral to offer, there’s a good chance you won’t even qualify.

Specific Terms

Don’t make the mistake of thinking you can use your SBA money to expand your business or research that new product you wanted to launch next year. The terms are very specific, and your loan can only be used for recovering costs associated with the natural disaster. This is not a business expansion loan, it’s a recovery loan to help you get back on your feet.

You Could Experience Another Disaster

Keep in mind that if you live near a coastline or in the path of any other frequent natural phenomenon, you could end up experiencing a similar disaster and being left with nothing. If you’re in the middle of paying back an SBA disaster loan and your business is leveled again, you could wind up thousands of dollars in debt with nothing to back it up or pay it off with. That’s not to say you have to move or consider other options, but another disaster is always a possibility. If it happened once, it can happen again!

Should I Take Out A Disaster Recovery Loan?

Ultimately, the decision to secure a disaster recovery loan comes down to individual preference. Do you want the financial responsibility of paying back a long-term loan, even if one with a 4-8% interest rate? Are you certain your business can even thrive should you rebuild it? These are questions you’ll want to ask yourself before you apply.

Be honest with yourself when you answer. Don’t sugar-coat things for the sake of the dream. If the business was failing before the disaster, it’s unlikely that a hurricane or tornado will be very helpful to its recovery.

Keep in mind that your personal assets can often be used as collateral for loans, but this puts you at serious risk if the loan defaults or another disaster occurs. If you lose your business once, you don’t want to lose your business and your personal collateral in the next disaster.

Small Businesses Are Crucial to Recovery

In areas affected by natural disasters, small businesses often become crucial to the area’s recovery. Why? Because when the local economy recovers, the community recovers. The first thing people need after a disaster are jobs so they can start earning money again and put their lives back together. As a small business, you’re part of that recovery process; providing jobs, goods, services, and acting as an example for the businesses around you.

Don’t take the decision to apply for funding lightly, but also understand the role you could potentially play in the recovery of the area.

The Bottom Line

Loans aren’t for everyone, we get that. Not every business can afford a loan, or even wants to incur the costs of a loan after a disaster. Many businesses simply choose to shut their doors. If you’re among the minority that decides to lift yourself up and rise from the ashes, you might want to consider some extra funding to jumpstart the process. Most businesses and business owners don’t have the entire cost of their business assets lying around in a savings account somewhere.

SBA disaster loans can offer good terms, some of the lowest interest rates, and quick funding to businesses affected by natural disasters, but as with any loan, they have drawbacks as well. Always pay close attention to the fine print/terms of your loan, and be 100% certain you need the funding before you apply. Disaster loans have very specific guidelines, and your business may not meet them. It’s a good idea to have a backup plan in place just in case you can’t get the funding you need.

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