If a disaster affects your business, either physically or economically, the Small Business Administration (SBA) offers loans specifically dedicated to helping fund its recovery. These loans can be highly beneficial for small business owners who need to repair damaged property, source operating capital, or shore up their businesses’ structures to prepare for future disasters.
Once a disaster is declared, business owners can check their eligibility, apply for an SBA disaster loan, and work with a loan officer to determine the amount as well as the disbursement schedule of their loan.
In this article, we’ll discuss the different types of disaster loan products available to small businesses, how to become eligible, and what business owners can expect when it comes to post-disaster recovery assistance.
- SBA disaster loans are low-interest, long-term loans meant to help businesses and individuals recoup damage or loss of property or income due to an unforeseen disaster.
- Examples of SBA disaster loans include physical damage, military reservist, and economic injury disaster loans.
- Disaster loans can depend on the kind of loss incurred by a business, and in some cases, a business can apply for more than one.
- The amount of the loan, the terms, and repayment schedule are unique to each application. So it’s important to understand your specific loan product and work directly with an SBA loan officer to ensure your business is meeting the terms of the loan.
What Is an SBA Disaster Loan?
SBA disaster loans are offered only to businesses and individuals affected by an officially declared disaster, such as a hurricane or drought. A running list of state disaster declarations can be found on the SBA’s website, although in some instances like a pandemic, disasters can be declared nationally.
Depending on the type of disaster and the damage to your business, there are different types of loans you may qualify for. In general, however, these loans are low-interest, long-term products designed to help businesses of all sizes, private nonprofits, homeowners, and renters in the face of an emergency.
Unlike traditional SBA loans, which are administered through bank partners, SBA disaster loans are the only direct loans made by the agency itself. These funds come directly from the U.S. Treasury, and the eligibility and terms are determined by the SBA alone.
Types of SBA Disaster Loans
Physical Damage Loans
Physical damage loans are intended to cover repairs and replacements to physical property damaged in a disaster and not fully covered by insurance or other sources. You can apply for these loans for business purposes or as a homeowner or renter.
- Business: You can receive a physical damage loan for your business for up to $2 million. These loans are not intended to upgrade or expand a business, just to cover what was harmed in a disaster and isn’t fully covered by insurance. You can use these loans for property, machinery, equipment, fixtures, inventory, or leasehold improvements. Collateral is required for loans over $25,000.
- Home and personal property: Physical damage loans also aid individuals who lost property during a disaster. Homeowners can apply for up to $200,000 to repair their primary residence, although the funds can’t be used to upgrade or make additions. Both homeowners and renters can apply for up to $40,000 to replace or repair personal property. Collateral is required to the extent possible for loans more than $25,000, although loans will not be rejected for the inability to provide collateral.
Mitigation loans are intended to help a business already recovering from a disaster to prevent increased damage in the future. If you’ve already received a disaster loan, you have two years from the approval date to request an increase of your loan by up to 20% of the physical damage sustained by your business. You can use these extra funds to mitigate future damage to your business, such as relocating out of a flood zone, installing mesh over vents to protect against embers during a fire, or installing pressure-rated windows for tornados.
Economic Injury Disaster Loans (EIDL)
Economic injury disaster loans (EIDLs) can help businesses that have suffered substantial economic injury and can’t meet their operating obligations as a direct result of a disaster.
EIDL assistance is only available to small businesses that the SBA determines are unable to obtain credit elsewhere.
EIDLs are intended to provide working capital to small businesses that need to cover normal expenses such as rent, utilities, benefits, and fixed debt payments. In general, these payments can be up to $2 million, or a total of $2 million when combined with a physical damage loan. These loans are invaluable during disasters that may not impact physical property, but still negatively impact a business, such as a public health and economic crisis.
Military Reservist Loan
Military reservist EIDLs help businesses with an essential employee who has been called to active duty. They offer up to $2 million in operating expenses, although that limit may be waived if your business is a major employer of active military members.
Owners have from the day an employee is called up for duty to up to one year after that employee ends active service to apply for a military reservist EIDL. Unlike other disaster loans, if your business has enough funds to cover its own recovery, then it is not eligible for a military reservist loan. Collateral is required for loans over $50,000, although the SBA will not reject a loan because of lack of collateral.
In all instances, funds issued by insurance policies may be deducted from your eligible loan amount.
How To Apply for SBA Disaster Loans
In the event of a disaster, knowing how and where to apply for funds and ensuring you have all the necessary information is essential, because if your application requires further documentation, you can lose your place in the queue. It’s important to research which loan is right for you, whether or not you qualify, and what to expect throughout the process so as not to waste any time.
Although there are some basic guidelines and caps for disaster loans, your specific loan amount and terms will be unique, so it’s important to work with your loan officer.
Qualifying for an SBA Disaster Loan
To determine your eligibility, a good place to start is by referring to the disaster determination for your area. If you are a small business or private nonprofit in a declared disaster zone, it is likely you can apply for a physical damage loan, an EIDL, or both. In the case of an EIDL, small agricultural cooperatives and small aquaculture businesses are also eligible to apply, as well as businesses that make up the supply chain of those directly affected by the disaster.
Where To Apply
The fastest and easiest way to apply for a disaster loan is online, although you can also apply via mail. To begin the process, the first step is to register with the SBA Disaster Loan Assistance portal, which will allow you to save and come back to an application in process. Next, gather the documents necessary to complete the application. Document requirements vary by loan type, but can include:
- Specific SBA loan application forms
- Tax authorization forms for each partner owning more than 20% of the business
- Three years of recent business tax returns
- Schedule of liabilities
- Personal financial statements for each partner owning more than 20% of the business
- Personal tax returns for all partners
- A current profit and loss statement
- Monthly sales figures
What To Consider
In general, disaster loans are low-interest, long-term loans. In the case of physical damage loans, if you have no access to other sources of credit, the interest will not exceed 4%. If you can obtain credit elsewhere, however, the interest is capped at 8%. For EIDL and military reservist loans, the rate is capped at 4%. Disaster loans generally have terms of up to 30 years, with no upfront fees or penalties for early payment.
Depending on your individual situation, you may not be approved for the capped limit. However, it costs nothing to apply, does not affect personal credit, and once approved, you are under no obligation to accept the funds.
Waiting for Approval
In general, the SBA attempts to process disaster loan applications within two to three weeks and disburse payment within five days after that. If you submit online, you can use your profile on the Disaster Loan Assistance homepage to check the status of your application. Using your application number will allow you to see which stage your application is in and offer an indication of when to expect your funds.
Do You Have To Pay Back SBA Disaster Loans?
You will be required to repay your disaster loan with interest on a schedule determined by your individual loan and unique terms. You will use the SBA Capital Access Financial System to access your loan information and payment schedule, then submit payments using pay.gov. Depending on the disaster, there may be some exceptions or unique terms. For instance, COVID-related EIDLs were deferred for two years.
Frequently Asked Questions (FAQs)
What can SBA disaster loans be used for?
In the instance of a declared emergency, SBA disaster loans can be used for various purposes intended to reduce the physical and/or economic harm caused to a business. Each loan has different qualified uses, so it's important to study the specifics of your loan and consult with an SBA loan officer.
How long does the SBA disaster loan process take?
The SBA generally tries to arrive at a decision about your loan within four weeks. If you are approved, you should receive up to $25,000 of your approved funds within five days.
What is the interest rate on SBA disaster loans?
Disaster loan interest rates vary depending on the loan product and on whether or not an applicant can receive credit from other sources. On average they range from 3% to 7%, and COPD-specific EIDLs carry 2.75% interest.