The U.S. Small Business Administration (SBA) gives businesses the opportunity to apply for low-interest business loans as assistance after declared disasters. In 2020, 359 companies were approved for disaster loan assistance, which was a 272% decrease over the 1,339 business loans that were approved in 2019 at the height of the pandemic.
SBA disaster loan assistance can be a great tool to help businesses through challenging times that occur entirely outside of their control. This guide covers what SBA disaster loans are, the benefits of disaster loan assistance, who qualifies and tips for applying.
What Is SBA Disaster Loan Assistance?
Businesses of all sizes, including nonprofit organizations, can apply for SBA disaster loan assistance after an official disaster has been declared by the state or federal government. Disasters may include civil unrest, as well as natural disasters, such as flooding, wildfires, hurricanes, earthquakes and more. SBA disaster loan assistance is meant to help businesses cover:
- Business losses not covered by insurance or funding from the Federal Emergency Management Agency
- Operating expenses that could have been paid for, had the disaster not happened
As the COVID-19 pandemic was declared a national disaster, businesses can apply for SBA disaster loan assistance to cover the costs of COVID-related business losses.
The SBA disaster loan assistance program is the only form of SBA assistance that isn’t limited to small businesses.
Benefits of SBA Disaster Loan Assistance
The SBA disaster loan program helps businesses in a time of dire need. The loans are set up with very favorable terms to make them easier to pay back. The loan terms and benefits include:
- All loans come with low interest rates (cannot exceed 4%).
- Each applicant can receive a loan of up to $2 million.
- Often, borrowers are granted a period where payments aren’t expected. Typically, this period is the first 12 months of the loan.
- The program charges no upfront fees or early repayment penalties.
- The repayment term is based on the business’s ability to repay the loan. As a result, the payment frequency, penalties and loan length are determined on a case-by-case basis.
Tips to Remember When Applying for SBA Disaster Loan Assistance
Applying for disaster loan assistance can be overwhelming. You’ve just been through a lot, your business has suffered and you likely want help as quickly as possible. Here are some useful tips to know before applying, so you can be fully prepared for the process:
1. Know the Different Types of Disaster Loans
The SBA offers four types of disaster loans depending on what your exact needs are.
- Economic Injury Disaster Loans (EID): An EID loan can help businesses cover financial losses they suffered due to a disaster. These loans are limited to small businesses, small agricultural cooperatives and the majority of nonprofits.
- Military Reservist Loan: This loan can help you cover some of the operating expenses to make up for any employees who were called to active duty.
- Mitigation Assistance: You can use this loan for up to 20% of your verified physical damage to make mitigation improvements to your business and reduce the chances of future damage. The most common mitigation projects are flood mitigation, wildfire mitigation, wind mitigation and earthquake mitigation.
- Physical Damage Loans: This type of loan helps cover the costs of damage to any buildings or assets resulting from the disaster.
It’s important to know which type of loan you’ll be applying for beforehand.
2. Make Sure Your Disaster Has Been Declared
The President or an SBA agency has to officially declare a disaster for it to be eligible for SBA disaster loan assistance. You can check the SBA Disaster Loan Assistance page for a list of all declared disasters. After a disaster is declared, the SBA website outlines which particular regions are defined as affected by the disaster.
3. Make Sure You Meet All Requirements
The SBA disaster loan assistance program has two straightforward requirements:
- Your business has to be located in an area that has been declared a natural disaster and said to be covered by the SBA.
- Your business must have suffered economic or physical damage as a result of the disaster.
Individuals looking for a loan to cover economic damage need to prove the extent of the economic damage.
Anyone applying for a loan to cover physical damage needs to file an insurance claim beforehand. The disaster loan assistance is only meant to cover the costs of physical damage not covered by insurance.
4. Gather Your Business Documents and Information Beforehand
You’ll need to provide extensive business and financial documents during the loan application process. Some of the information you’ll need includes:
- A list of compensation from any other sources received due to the disaster (grants, donations, etc.)
- Bank routing information
- Business gross revenue
- Business insurance information
- Business owner personal information (SSN, date of birth, place of birth, U.S. citizen status, residential street address, etc.)
- Cost of goods sold for the 12 months prior to the date of the disaster (found on your annual income statement)
- Filed tax return for the business for the previous two years
- Insurance claims filed for the disaster
- IRS form 4506T (this form gives the SBA authorization to go to the IRS for up to three years of tax returns)
- Gross revenues for the 12 months before the date of the disaster (found on your annual income statement)
- Personal finance statements (all business partners with ownership in the company will have to submit income statements, financial statements and individual tax returns)
- Schedule of liabilities for all fixed debts
- Tax identification number
- The legal business entity type
Having all this information gathered beforehand helps make the loan application process a lot easier. The SBA reviews this information to determine your eligibility, as well as how much money you need.
5. Provide Your Personal Phone Number
You should consider listing your personal phone number when the application asks for a business phone number. Someone will likely need to reach out to you while reviewing your application, and this ensures they can contact you in a timely manner.
6. Loans Over $25,000 Require Collateral
If you require more than $25,000, the SBA has the right to ask you for personal collateral. However, if you can’t come up with collateral, it doesn’t necessarily mean you’ll be denied a loan. The SBA will review what you can provide as collateral and use that to determine how much you qualify for. Liens on real estate are a popular form of collateral.
The SBA cannot ask you for collateral if you’re requesting less than $25,000. However, some people opt to offer up collateral to increase their chances of being approved for a loan.
Before you apply, understand whether you have any collateral, how much it’s worth and whether you’re willing to put it up to secure a loan.
7. A Criminal Background May Hurt Your Chances of Approval
As you’re applying for SBA disaster loan assistance, you’ll notice that step four of the application process asks whether any of the business owners have been involved in criminal charges. You should always answer this question honestly, but note that it may hurt your chances of loan approval. A criminal background isn’t grounds for an automatic loan denial, but it’ll be a factor in decision-making.
8. You’ll Need to Show the Ability to Repay
One of the reasons you need to provide so much detailed information is to show the SBA your business is in a relatively healthy state and can afford to pay back the loan. Unfortunately, your application may be denied if you have poor cash flow or a high debt utilization ratio. (Don’t worry — see tip 10 for hope on how to address this issue!)
9. Know Your Personal Credit Matters
During the application process, your personal credit will be pulled and evaluated. An acceptable credit score is needed to be approved for SBA disaster loan assistance. Your credit score also helps determine how much of the maximum $2 million loan amount you’ll receive.
There aren’t any technical requirements for a minimum credit score, but it’s estimated that you’ll need a score above 620-650 to be approved. To get a complete credit picture of you, the SBA may also look at other factors, such as whether you pay your utility and business rent bills on time.
10. You Can Appeal If You’ve Been Denied
If your loan application is denied, the good news is that you can appeal the decision. The SBA will send you a letter explaining why you’ve been denied. After receiving this letter, you have six months to provide new business information and request an appeal. If your loan has been denied because of missing data, you can provide whatever was missing. In cases where a loan was denied due to other factors, such as lack of collateral or high debt utilization, you have up to six months to try to improve your situation.
Of course, the SBA disaster loan isn’t the only loan option out there. While SBA disaster loan assistance has many benefits, you can always turn to other lenders if you can’t get SBA approval.
11. Take Your Time With the Application
The biggest delay in loan approvals is missing information in the application. Make sure you take your time as you complete the application process and ensure all the information you’re submitting matches the supporting documents. Completing the application correctly the first time will save you time and reduce back-and-forth.
Lendzi Helps Businesses Get Loans Fast
Lendzi knows how challenging it can be to apply for loans and secure capital. This process is especially frustrating when your business has just been through a disaster and is struggling to get back on its feet. We can help simplify the process. With Lendzi, you fill out one application, and we find the best disaster loan out there for you. You don’t have to submit multiple applications, research all your options and compare final offers — we do it all for you. Our disaster loan options include the SBA disaster loan assistance program, as well as others. If you want help acquiring a disaster loan quickly, fill out a Lendzi application today.