Small Business Disaster Loans
Disaster loans can be the best way for small business owners to get back on their feet after a big storm or other natural disaster. Financing that can help to pay for repairs and other recovery-related expenses is a lifeline for a business at the most critical time.
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Disaster loans for small businesses are the best choice for entrepreneurs to recover quickly from unexpected disruptions. When a natural disaster strikes leaving thousands of households and small businesses without electricity or access to supplies, the cost can quickly rise to billions of dollars' worth of damage.
Depending on how your business has been affected you may not be able to count on your insurance policy to cover the costs of all your damages. Plus with hundreds of other businesses in the same situation, it could take a long time to pay your claims -- time that you don't have to wait.
Disaster loans for businesses are generally (and primarily) administered by the US Small Business Administration (SBA). SBA disaster loan assistance provides business will low-interest rate loans in the event of loss or damage to a business entity in the event of a natural disaster. However, other government agencies such as the Federal Emergency Management Agency also provide economic recovery resources to those businesses affected by disasters.
According to the SBA website, disaster loans are available to businesses of all sizes and are designed to repair or replace specific items damaged or destroyed in a declared disaster area. These include: real estate, personal property, machinery and equipment, inventory and business assets. Here is everything you need to know about this unique kind of emergency financing.
- Eligibility for a Disaster Loan
- Types of Disaster Loans
- Interest Rates on Disaster Loans
- Application Process for Disaster Loans
- Loan Process Step-by-Step
- What Happens after you are approved for your Disaster Loan?
- Disaster Loan Application Document Checklist
- What You Can Do if Your Disaster Loan Is Declined
Eligibility for a Disaster Loan
If you operate a private business or non-profit business entity that has suffered physical damage and has sustained economic loss as a result of a disaster, you may qualify for a disaster loan and other financial assistance from the SBA. Disaster loans are granted to businesses within declared disaster zone and offer long-term, low interest rate loans.
Even if your business was not directly damaged due to the occurrence of a natural disaster in a declared disaster zone, you may still qualify for this type of loan if the economic conditions caused by the disaster have affected your business.
It is important to keep in mind that the provisions of the SBA Disaster Loan program can only approve loans to applicants with a reasonable ability to repay the loan and other obligations from earnings. There is a common misconception that SBA Disaster Loans are freely given to any business in a disaster zone. Unfortunately, this is not the case. On the contrary, SBA loans of any type are in actuality very selective and often require exceptional credit history and a solid operating history. The SBA is very meticulous about its requirements and applicants can expect to provide very detailed information about their business and their personal finances.
As a result, SBA loans often can take up to three months to be approved in most cases.
Basic Eligibility Requirement at a Glance
Physical Disaster Loans Economic Injury Disaster Loans Physical Disaster Loans Any size business and most private nonprofits affected physically by a declared disaster Economic Injury Disaster Loans Small businesses, small agricultural cooperatives and most private nonprofits suffering adverse economic injury by declared disaster
Types of Disaster Loans
Physical Disaster Loans
As the name implies, this type of loan relates to uninsured or underinsured property that has been damaged or lost as a result of a declared disaster. These loans are designed to replace or repair real estate, equipment, inventory and equipment. Physical disaster loans can be up to $2 million for the express purposed above. However, at the discretion of the SBA, these loans can be increased by up to 20% to protect the property against similar damage in future similar disasters.
Maximum Loan Amount $2 million Supplemental (for future loss prevention of similar occurrence) Up to 20% additional ($400,000 max) Maximum Repayment Term of Loan 30 Years Fees None directly from SBA, 3rd party lender fees may apply Collateral Varies for loans above $25,000
Economic Injury Disaster Loans (EIDL)
These types of disaster loans are available to small businesses, small agricultural cooperatives and generally most private and nonprofit organizations of all sizes who have suffered "substantial" economic losses as the result of a declared disaster. Companies meeting these criteria may apply for loans up to $2 million, similar to Physical Disaster Loans to meet financial obligations or expenses incurred by the business if the disaster had not occurred (actual loan amounts are based on amount of economic injury).
Interest Rates on Disaster Loans
The interest rate on both Physical Disaster Loans and Economic Injury Disaster Loans will not exceed 4 percent, with the provision that you cannot obtain credit from another source. The term of repayment can be up to 30 years, depending on the business's ability to repay the loan. For businesses and nonprofit organizations with credit available elsewhere, the interest rate will not exceed 8 percent. SBA determines whether the applicant has credit available elsewhere.
It should be noted that the interest rates above represent the maximums according to the SBA. However, different interest rates are calculated for each disaster by the SBA and the SBA will publish the rate schedule accordingly.
Additionally, SBA determines whether the applicant has credit available elsewhere.
For a list of currently declared disasters, the US Government Department of Homeland Security provides a website at www.disasterassistance.gov. This agency also provides additional information and resources for business affected by disasters.
Application Process for a Disaster Loan
Unlike many other types of SBA loans, businesses wishing to apply for an SBA Disaster Loan can apply directly to the SBA.
Applicants may apply for a disaster loan online, via mail or walk-in to an SBA disaster center.
Before applying for an SBA Disaster Loan and after there has been a Presidential declaration of a disaster you must first register with the Federal Emergency Management Agency (FEMA). visit DisasterAssistance.gov.
The following information is required to complete the SBA online application:
- Contact information for all applicants
- Social security numbers for all applicants
- FEMA registration number
- Deed or lease information
- Insurance information
- Financial information (e.g. income, account balances and monthly expenses)
- Employer Identification Number (EIN) for business applicants
Business owners can also reach out to a business financing expert who can help them understand the whole process and help them get started while they're still focusing on dealing with the aftermath. That type of assistance can also make it much easier to get funds quickly, which can often be a challenge when so many different businesses are affected by a catastrophe.
The Disaster Loan Process Step-by-step
- The first step the SBA will take after receiving your application will be to review your credit profile. Just a reminder, applicants generally must have a strong credit history and demonstrate an ability to repay the loan in order to receive an SBA loan.
- Once you have completed your application and have met the minimum credit worthiness criteria, the SBA will send an inspector to estimate the cost of your damage.
- A loan officer will determine your eligibility during processing, after reviewing any insurance or other recoveries. SBA can make a loan while your insurance recovery is pending.
- A loan officer works with you to provide all the necessary information needed to reach a loan determination. Our goal is to arrive at a decision on your application within 2 - 3 weeks.
- A loan officer will contact you to discuss the loan recommendation and your next steps. You will also be advised in writing of all loan decisions.
What Happens After You Are Approved for a Disaster Loan?
- SBA will prepare and send your Loan Closing Documents to you for your signature.
- Once they receive your signed Loan Closing Documents, an initial disbursement will be made to you within 5 days:
- Physical damage: $25,000
- Economic injury (working capital): $25,000 (In addition to the Physical damage disbursement)
- A case manager will be assigned to work with you to help you meet all loan conditions. They will also schedule subsequent disbursements until you receive the full loan amount.
- Your loan may be adjusted after closing due to your changing circumstances, such as increasing the loan for unexpected repair costs or reducing the loan due to additional insurance proceeds.
Required SBA Disaster Loan Documentation Checklist
- Business Loan Application (SBA Form 5) completed and signed by business applicant.
- IRS Form 4506-T completed and signed by Applicant business, each principal owning 20% or more of the applicant business, each general partner or managing member and, for any owner who has more than a 50% ownership in an affiliate business. (Affiliates include business parent, subsidiaries, and/or businesses with common ownership or management).
- Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business; an explanation if not available.
- Personal Financial Statement (SBA Form 413) completed, signed and dated by the applicant (if a sole proprietorship), each principal owning 20% or more of the applicant business, each general partner or managing member.
- Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used).
ADDITIONAL INFORMATION THAT MAY BE NECESSARY TO PROCESS YOUR APPLICATION:
- Complete copies, including all schedules, of the most recent Federal income tax returns for each principal owning 20% or more of the applicant business, each general partner or managing member, and each affiliate when any owner has more than a 50% ownership in the affiliate business. Affiliates include, but are not limited to, business parents, subsidiaries, and/or other businesses with common ownership or management.
- If the most recent Federal income tax return has not been filed, a year-end profit and loss statement and balance sheet for that tax year is acceptable.
- A current year-to-date profit and loss statement.
- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures.
What to do if Your SBA Disaster Loan Application Has Been Denied?
Although nobody in the SBA wants to make life more difficult on a business owner whose business has just been hit by a major disaster, there are rules and requirements that sometimes mean that loan applications are denied. In these cases, it's important for business owners to try to understand the decision and take quick action to remedy any possible reasons they were found ineligible on their initial application.
You should take two steps right away if you get a denial notice:
- Call the SBA to get more info about why they denied your loan application.
- You can request reconsideration of the decision to deny your application.
There are two levels of reconsideration.
- First level: You must file your request for reconsideration with the Disaster Assistance Processing and Disbursement Center (DAPDC) in Fort Worth, Texas, within six months of the date of the denial letter. The SBA will assign your application to a new loan processor.
- Second level: If they deny your reconsideration request, you appeal to the DAPDC Director. You must do this within 30 days of the first reconsideration decision. Another loan processor will assess your application.
If you also applied for FEMA assistance: You may actually want the SBA to deny your loan application if you've been approved for a FEMA grant. Once the SBA has processed a denial you can ask for an increase to your FEMA grant.
Assuming you're still unable to get the SBA disaster funding approved, you don't have to give up on the idea of getting some extra financing assistance to get you back on your feet. There are many business funding sources that can help you out. Talk to one of them for a personalized recommendation about what you should do next to help your business recover.
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