Last year saw a record-breaking number of natural disasters – from Hurricanes Harvey, Irma and Maria, to earthquakes in New Mexico and the Iran-Iraqi border. The devastating impact of these extreme weather changes was screened on news networks around the world. However, their financial impact on businesses is something we seldom hear about.
Recovering from a natural disaster is not like recovering from a bad review or social media nightmare. In the aftermath of a natural disaster, small businesses are often hit the hardest, and according to the Federal Emergency Management Agency (FEMA), 40% of those small businesses never recover. So, what can be done to protect your business?
The role of disaster planning is key, but many businesses get caught short after an unprecedented disaster. Luckily, there are several types of commercial loans to help these companies recover.
What kinds of financial disaster could affect your business?
Disasters are most likely to strike your business if you operate in an area that’s prone to droughts, wildfires, severe thunderstorms or flooding. However, the reality is that a disaster could strike your business at any time, so it’s important to be prepared. Luckily, there are commercial loan options for businesses that have been affected by a disaster, such as the SBA disaster loan.
SBA disaster loans: how and when to apply
The Small Business Association (SBA) provides loans to businesses after a natural disaster such as a hurricane, drought or tornado. These loans present a low-interest solution for businesses of all sizes, including non-profit organizations. The purpose of your loan is to help you meet the financial obligations you would have met if the disaster had not occurred.
The loan can be used for property, assets, machinery, inventory and industrial equipment financing. The maximum loan amount you can claim is $2 million for Physical and Economic Disaster Loans.
There are several different types of disaster loans provided by the SBA, including:
- Business Physical Disaster Loans: This cash advance is available for business owners so that they can replace physical assets such as property, equipment, machinery, fixtures, and inventory. You can take them out at the same time as claiming on insurance. Businesses of all sizes are eligible to apply.
- Business Economic Disaster Loans: These are working capital loans meant to help businesses meet financial obligations that have been impacted by a natural disaster. Only small businesses, private non-profits, and small agricultural co-operatives can apply.
- Military Reservist Economic Injury Loans: These loans are available to small businesses who cannot meet their operating costs because an employee has been called to active duty. The amount is limited, and there are stricter eligibility requirements for this loan. For example, borrowers can only apply if they do not have sufficient funds to continue running the business normally.
- Home and Personal Property Disaster Loans: Homeowners who have been affected by a declared disaster are eligible to borrow from the SBA without owning a business.
If a declared disaster has physically or financially impacted your business, you are most likely eligible for an SBA disaster loan. However, different SBA loans have different eligibility requirements.
The Business Physical Disaster Loan is available to businesses of any size, including non-profits, while Business Economic Injury Disaster Loans are available to small businesses and agricultural cooperatives that have been affected financially by a declared disaster. To be eligible for a Business Economic Injury Disaster Loan, your business must not be able to obtain financing elsewhere. Home and Personal Property Loans are also available if you own a primary residence that was affected by the disaster.
When deciding whether you are eligible for a loan, a loan officer will review your credit score and insurance payments. The lender will also assess your property for damages.
Repayment terms for disaster and equipment loans will be different for each applicant and each disaster. However, the maximum repayment term for a Business Physical or Economic Disaster Loan is 30 years. Maximum interest rates for business loans after a disaster are between 4-8%, and you will usually get a lower-interest loan if you can’t obtain finance from elsewhere.
When taking out a disaster loan from the SBA, you will most likely need to provide a personal guarantee. This means you will need to take the loan out against your personal assets, such as vehicles or real estate. If for any reason you default on your repayments, your personal assets could be seized.
If there are multiple loan applicants (i.e., business partners), then you can share the personal guarantee by each being liable for a portion of the loan.
How to apply for a small business loan after a disaster
You can apply online for all types of SBA commercial loans, including disaster loans. When applying, you must include a signed and dated IRS Form 4506-T, which gives the IRS permission to share your tax return information with the SBA. You can also apply in person at a Disaster Recovery Centre near you.
To apply for a disaster loan from the SBA, you will need to follow certain steps:
- Check you are eligible for a disaster loan
- Submit a Presidential Disaster Declaration
- Register with the Federal Emergency Management Agency (FEMA) for a registration number
You will need to supply the following information when applying for an SBA disaster loan:
- Contact information for yourself and all other loan applicants, including social security numbers
- FEMA registration number (as mentioned above)
- Deed or lease property information
- Insurance details
- Account balance, income and monthly expenses
- Employer Identification Numbers for all applicants
If your disaster loan is approved, you will need to pay it back by making a one-time payment or in monthly installments. You can apply for a disaster loan on the SBA website.
A declared disaster could be devastating for your business. However, with the right preparation and proper funding, you don’t have to be one of the many companies that closes its doors in the aftermath. The SBA disaster loan could help cover your costs and help you financially recover from a natural disaster.
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