If your business has been impacted by a natural or human-caused disaster, help is available.

SBA disaster loans are designed to help small businesses recover, rebuild, and reduce the risk of future damage.

What Are SBA Loans?

Because these loans are meant to assist business owners in times of need, rates and terms tend to be fairly forgiving.

The United States Small Business Administration (SBA) is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) and other community-based entities to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

Additionally, the SBA makes direct loans to small-business owners who are recovering from a declared disaster.

Reasons to Consider an SBA Loan

SBA loans can offer small businesses several key advantages, including:

• Competitive rates: Because they’re a lower risk for lenders, SBA loans often feature lower interest rates.
• Lower fees: SBA loans may involve an upfront and/or yearly service fee, but these are generally nominal.
• Longer terms: Maximum maturities range from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate).
• More flexibility: Loan amounts range from $500 to $5.5 million, depending on your needs and capacities.
• Continued support: The SBA and its local partners offer free and low-cost business training and counseling.

What Is the SBA Disaster Loan Program?

Amid the COVID crisis, the SBA was instrumental in administering the Paycheck Protection Program (PPP)and the COVID-19 Economic Injury Disaster Loan (EIDL), along with other relief loans and grants. While it’s no longer accepting applications for these programs, the agency continues to offer low-interest loans to businesses located in regions affected by declared disasters.

Qualifying disasters may be natural catastrophes (like tornadoes and earthquakes), longer-term climactic conditions (like droughts and freezes), or human-caused incidents (like civil unrest and gas line explosions). SBA disaster loans can help small businesses overcome substantial economic injury and/or physical damage resulting from these events.

In most cases, the maximum loan amount is $2 million. Because these loans are meant to assist business owners in times of need, rates and terms tend to be fairly forgiving. Typically, collateral is required to the extent possible – but again, the rules tend to be more lenient than for general small-business loans like the SBA Standard 7(a) or CDC/504.

Am I Eligible?

You must be in a declared disaster area to be eligible for an SBA disaster loan. Beyond that, eligibility depends on the type of loan you’re seeking and what you intend to use the funds for. Determining factors may include the size of your business, how much insurance coverage you have, the degree of financial hardship you’ve experienced, and whether you’re able to obtain credit elsewhere.

How Can I Use It?

Because disasters can bring about so many different kinds of financial needs, the SBA has four different disaster loan programs, each with its own purpose:

1. Physical damage loans enable businesses to recover from losses not fully covered by insurance or funding from the Federal Emergency Management Agency. They can be used for the repair or replacement of buildings, machinery, fixtures, and inventory. They cannot be used to upgrade or expand a business except as required by building codes.
2. Mitigation assistance allows recipients of physical damage loans to receive additional funding (up to 20% of assessed real estate damage) to make property improvements that protect against future disasters. Qualifying projects could include installing a fire-rated roof, upgrading to multi-pane windows, and reinforcing masonry.
3. Economic Injury Disaster Loans help small businesses to cover their ordinary and necessary operating expenses in the wake of a disaster. Approved uses include rent, employee benefits, utilities, and fixed debt payments. Businesses may qualify for both an EIDL and a physical disaster loan, but the maximum combined loan amount is $2 million.
4. Military Reservist Economic Injury Disaster Loans (MREIDLs) are for businesses who have experienced interruptions because an essential employee has been called to active duty in a military reserve force. These funds can be used only for ordinary and necessary operating expenses – not for business expansion or refinancing long-term debt.

How Do I Apply?

The first step is to confirm that the SBA has issued a disaster declaration in your area. Next, you’ll apply for assistance on the SBA website. Here are some of the documents you’ll likely need to provide:

• A state-issued ID
• A personal financial statement
• A schedule of liabilities
• Your most recent federal tax returns
• Relevant business insurance policy information

Additional documentation may be requested depending on the specific loan program you apply for. If you’re seeking a physical damage loan, SBA personnel may inspect your business property to estimate your losses and determine your loan amount.

The SBA strives to make loan decisions within two to three weeks after receiving complete application packages, and your initial disbursement should be made within five business days of closing.

An SBA case manager will work with you to answer questions and guide you through the whole process.

How Do I Pay It Back?

Usually, SBA disaster loans are structured as term loans with capped fixed interest rates. That means you’ll pay a set amount every month until the end of the term, much like a standard residential mortgage or auto loan. Maturities range up to 30 years, allowing for lower monthly payments than most comparable loan products.

You won’t pay closing or servicing fees, although you may be responsible for outside expenses like recording fees. There are no penalties for prepayment.

What Are My Other Options?

There are several other types of SBA loans you may want to consider, including:

• 7(a) loans, which are the most popular SBA loans and can be used for a wide range of purposes
• 504 loans, which can be used for long-term fixed assets like real estate and major equipment
• Express loans, which feature an accelerated turnaround time and have special options for exporters
• Microloans, which provide up to $50,000 for smaller startup and expansion needs

Your financial institution can also help you to investigate non-SBA loan products and weigh the pros and cons of each.

Take the First Step Today

To explore all your small-business financing options, including SBA disaster loans, consult your financial institution.

 

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