Insurance will cover much of the cost of recovery for small businesses across southeastern Texas from Hurricane Harvey, but likely not every dollar of damage.
For the physical and economic damage that policies won’t pay for, the Small Business Administration’s disaster loan program is a good way to fill the gap and help your business regain its footing.
The SBA disaster loan program offers low-interest loans of up to $2 million to businesses in federally designated disaster areas. The agency recommends that affected businesses apply as soon as possible, even if they plan on seeking relief from other sources, such as insurance.
“In disasters, the recovery is not from any one entity,” says Mark Randle, a lead public information officer for the SBA. “Every piece of the puzzle helps people put things back together.”
Here’s what you need to know before applying for an SBA disaster loan.
What is an SBA disaster loan?
The president’s declaration of a region as a disaster area allows residents there to apply for various forms of federal assistance, including SBA disaster loans. (More information about the SBA’s assistance related to Hurricane Harvey is here.)
The agency offers three types of disaster loans:
- Business physical disaster loans are for repairing or replacing disaster-damaged property owned by the business, including buildings, inventory, supplies and equipment. They’re available to businesses of any size, and you can get one whether yours is a for-profit business or a nonprofit.
- Economic injury disaster loans are essentially working capital loans aimed at helping businesses meet the financial obligations they would ordinarily meet but for the disaster. Most private nonprofit organizations are eligible, but these loans are available only to small businesses, small agricultural cooperatives and small aquaculture businesses that fit the agency’s criteria.
- Home disaster loans of up to $200,000 for repair or replacement of real estate and $40,000 for repair or replacement of personal property are available to homeowners and renters.
The limit for each of the business-related loans is $2 million. Businesses can be eligible for both, but the total loan amount for any individual business for the physical and economic injury loans can’t exceed $2 million. The limit doesn’t include home disaster loans.
Applicants for a physical loan will be considered for an economic injury loan automatically. Even if your business hasn’t sustained physical damage, it may still suffer economic damage if, for example, your customers are wiped out and can’t pay their bills.
The SBA approved $513.5 million in disaster loans to businesses in nine states for damage related to Hurricane Sandy and its aftermath in 2012.
Application process for an SBA disaster loan
The SBA aims to arrive at loan decisions within two to three weeks. If you’re approved, it aims to make the first disbursement — up to $25,000 for physical and economic injury loans — within five days of closing. Here are steps in the application process:
- Apply for a loan in person at a disaster center, by mail or online.
- The SBA reviews your credit history to make sure you have a record of paying your debts and bills on time. The agency doesn’t have a hard-and-fast credit score cutoff.
- The agency inspects your business property to estimate your physical losses.
- A loan officer evaluates your eligibility and estimates the size of your loan based on the inspection and any expected insurance payouts.
- You provide all required documents to the loan officer. This includes information about the business and its owners, as well as its past performance. The agency requires applicants to show they can make their loan payments.
- Business loans over $25,000 require collateral. The agency won’t decline an application for lack of collateral but will require you to pledge what is available.
- If you’re approved, the agency sends you closing documents for your signature. Once you return those documents, it’ll make the first disbursement. Randle says that because interest starts accruing when you receive the money, the agency won’t send it to you until you signal that you’re ready to take it.
- A case manager helps you meet the conditions of the loan — having hazard and flood insurance, for example — and sets a schedule for disbursements until you receive the whole loan amount.
- The agency may adjust your loan due to changing circumstances, such as if your financial need increases or decreases, or you get an unexpected infusion of insurance money. If the overall amount from your insurer ends up covering part of what your loan was intended to cover, you have to use the duplicate amount to pay down your loan balance, Randle says.
Deadline for applying for an SBA disaster loan
By law, the deadline to apply for a physical damage loan is 60 days, or roughly two months, after the declaration of a disaster. The deadline for an economic injury loan application is nine months.
It’s best to apply early because applications are reviewed on first-come, first-served basis. There’s no harm in testing the waters, Randle says, because you’re not obligated to take the loan if you don’t end up needing it.
On the other hand, if you miss the deadline, you have to show that circumstances out of your control prevented you from applying.
Interest rates and terms for SBA disaster loans
For each disaster, the SBA sets rates for physical disaster loans that differ for borrowers who don’t have credit available elsewhere and those who do. Rates for borrowers without other credit are lower and are determined by a statutory formula that caps them at 4%. For borrowers with other credit options, the limit is 8%. For all economic injury loans, rates are capped at 4%.
For Hurricane Harvey, the interest rates for physical loans are 3.305% for those with no credit available elsewhere and 6.61% for those with credit available elsewhere. The rate for economic injury loans for for-profit businesses is 3.305% and 2.5% for nonprofits.
The agency doesn’t charge points or closing or servicing fees on SBA disaster loans, though you might be on the hook for outside fees, such as recording fees and title insurance.
In general, disaster loan terms can stretch to 30 years. The exception is for businesses with credit available elsewhere, which can get loans only up to seven years.
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