SBA Disaster Loans: Everything You Need To Know
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Andrew has over a decade of experience in finance and mortgage lending. He shares his expertise in Fit Small Business’s financing content.
This article is part of a larger series on Business Financing.
If a disaster has caused damage to your business and you couldn’t get a loan, a Small Business Administration (SBA) disaster loan, an affordable financing method, can give you the funding needed to restore operations as quickly as possible. Many types of SBA disaster loans have rates below 4% with repayment terms of up to 30 years.
Funds can cover business debts, repairs, replacement of business equipment, expenses for employee health benefits, and more, but there are qualification requirements you must meet. You’ll need to see if the location of your business is included in an eligible declared disaster. Different types of disaster loans also have varying requirements and may require proof of the extent of economic or physical damage to your business.
To find out if you qualify, you can submit an application on the SBA disaster loan website.
Who an SBA Disaster Loan Is Right For
- Your business was impacted by a disaster: The SBA website shows a list of declared disasters. Disasters can include storms, tornadoes, earthquakes, hurricanes, wildfires, floods, and droughts.
- You have already sought coverage from insurance: Before applying for an SBA disaster loan, you should first check what your insurance company can cover. You can also check with government agencies such as the Federal Emergency Management Agency (FEMA) for additional assistance.
- You have been unable to get financing from other lenders: To get an SBA disaster loan, you may need to show that you have been denied financing from other lenders.
- You need funds to cover physical damage: Physical damage to property or business equipment can be covered by an SBA disaster loan. You can use the funding to repair or replace these items.
- You need funds to cover operational costs: An SBA disaster loan can be used to cover expenses that could have been met had the disaster not occurred. Some examples include rent, utilities, health benefits for employees, and business debt payments.
- Your business has active military duty employees: Businesses that are unable to meet expenses as a result of their employees being called to active duty can qualify for assistance from the SBA.
- You’re a property owner or renter: Even if you aren’t a business owner, you could be eligible for an SBA disaster loan if you have experienced damage to your home or personal property.
Prohibited Uses of SBA Disaster Loans
SBA disaster loans are primarily designed to help businesses recover from the effects of a disaster, and your loan could be called due and payable immediately if you use the funds for something that’s not allowed. Restrictions can vary based on the type of SBA disaster loan you get, so you should read your loan terms carefully.
Here are some examples of prohibited uses for an SBA economic injury disaster loan (EIDL), one of several types of disaster loans. While there are some circumstances under which these are allowable for other types of SBA disaster loans, it isn’t common, and you should check your loan terms before using funds for:
- Paying bonuses or dividends
- Repaying other federal debt
- Funding relocation expenses
- Funding building expansions
- Purchasing additional real estate
- Paying penalties or debt that was incurred as a result of noncompliance with a federal law, state law, or government agency
How SBA Disaster Loans Work
To get an SBA loan, there are a few things that must first occur at the federal and state level. Businesses can then apply for funding directly through the SBA.
The SBA website has a list of declared disasters eligible for assistance. Disasters can include hurricanes, tornadoes, droughts, wildfires, floods, and more. The extent of the damages caused by the disaster will determine the type and amount of assistance that will be made available.
To receive federal assistance, states must show that the amount of funding needed to help businesses is beyond their own capabilities. As part of this process, states must assess the type and scope of damage, including estimated damage amounts and impacted areas.
The information gathered will determine eligibility requirements, after which the SBA will provide details on the type of assistance that will be provided as well as qualification requirements. Loan terms will also be provided and include interest rates and repayment terms.
SBA disaster loan applications are submitted via the SBA website. While other types of SBA loans are handled by individual lenders, disaster loans are reviewed and funded by the SBA itself.
To ensure a streamlined process and improve your chances of getting approved quickly, we recommend reading our guide on how to get a small business loan.
After you apply and provide the SBA with your completed application, it can take four to eight weeks to hear back. For this reason, it’s important to apply as soon as possible if you need funds to keep your business running. In extreme circumstances, the SBA may release a small amount of funds up front, with the remainder of funds being disbursed after it formally completes its review.
After receiving a loan approval from the SBA, you’ll be able to sign your final loan documents agreeing to the terms of the loan, such as the interest rate, loan amount, repayment term, and monthly payment amounts. Loans typically are funded within one week of signing.
SBA disaster loans may have a short period of time in which the loan payments are deferred. This can vary depending on the disaster and the SBA’s evaluation of your loan application and business needs. Ultimately, deferred loan payments may be offered to give businesses temporary relief while normal business operations are restored.
Types of SBA Disaster Loans
There are different types of SBA disaster loans you can choose from depending on your qualifications and what you intend on using funds for:
- Economic injury disaster loans (EIDL): Small businesses, agricultural cooperatives, and private nonprofit organizations can apply for up to $2 million in funding that can be used for operating expenses that could have been met had a disaster not occurred. Loan terms will be based on your company’s financial needs. EIDLs are only available for businesses that were unable to obtain financing elsewhere. You can read our guide on what SBA EIDL loans are and how they work for more details.
- Business physical disaster loans (BPDL): Up to $2 million in funding is available to businesses of any size. Funds can be used for the repair or replacement of property, machinery, equipment, inventory, fixtures, and leasehold improvements. BPDL loans cover losses that aren’t fully covered by insurance.
- Military reservists economic injury loans (MREIDL): If your business is unable to satisfy normal operating expenses because an essential employee of yours was called to active duty, you can get up to $2 million in financial assistance.
- Home and personal property loans: If you aren’t a business owner but have experienced damage to your home or personal property, you could be eligible for assistance. Property owners and renters are both eligible. Up to $200,000 in funding is available for primary residence repairs or replacements, and up to $40,000 is available to replace or repair personal property.
If an SBA disaster loan isn’t the right fit, you can view our article on other types of SBA loans for alternative financing options.
SBA Disaster Loans: Terms, Rates & Requirements
Loan terms and qualification requirements vary depending on the type of SBA disaster loan you choose.
Interest Rates |
|
Maximum Loan Amounts |
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Repayment Terms | Up to 30 years |
First Payment Date | Deferrals available, typically 3 to 6 months if granted |
Minimum Credit Score |
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Minimum Time in Business | None |
Minimum Business Revenue | None, but must be sufficient to repay the loan |
Collateral |
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Other Requirements |
|
How To Apply for an SBA Disaster Loan
To get started, you can apply for an SBA disaster loan online. Be prepared to provide a lot of paperwork. As part of the application process, there are SBA-specific forms that must be completed. You should also expect to be requested to provide certain financial statements for your business.
- IRS Form 4506-T: Gives the SBA permission to obtain a copy of your tax returns
- SBA Form 159: Fee disclosure form and compensation agreement; you can read our guide on how to fill out Form 159
- SBA Form 413: Personal financial statement listing things like assets, liabilities, and income; you can read our instructions on how to fill out Form 413
- SBA Form 2202: Provides a list of debts and financial obligations
- SBA Form 1368: Additional requirements form for EIDL loans; you can read our article on how to fill out Form 1368
The loan you apply for and your business circumstances will determine what documents the SBA will require. However, the documents below are commonly requested items. If you have them prepared, you could save a significant amount of time in getting your loan approved:
- Documents showing the scope of damage from the declared disaster
- Evidence of your loan applications being denied by other lenders
- Tax returns (business and personal, up to three years)
- Profit and loss statements (current and prior years)
- Balance sheets (current and prior years)
- Cash flow statements
- Bank statements
- Business licenses
- Industry certifications
After you apply, it can take four to eight weeks before you receive funding. During this time, your application will be reviewed by the SBA to ensure it meets its lending requirements. You may need to provide additional documents to clarify any discrepancies, but once your loan is approved, you can sign your final loan documents to have funds disbursed:
- Review of loan application: The SBA will conduct an initial preliminary review of your application to determine if it fits the parameters of a loan that can be issued. It will also determine the documents that will be required to verify your eligibility.
- Order inspections: Depending on your specific circumstances and loan type, an inspection may be required to assess the scope of damage and obtain an estimate of the amount of funds needed to repair or replace property or business equipment.
- Undergo loan underwriting: Once the SBA has received all the required documentation, it’ll conduct a full review to determine your eligibility. It is not uncommon during this stage for the SBA to ask you for additional documents to address any questions or concerns it may have regarding your business.
- Discuss loan decision: Once the SBA has made a final decision on your loan, it will discuss its decision with you, including terms, repayment schedules, and interest rates. Decisions can include approvals or denials. It can also include counter offers if it can issue a loan to you, but with terms different from what you initially requested.
- Schedule loan signing: After you are approved for a loan, your next step will be to sign your final closing documents that outline the terms and conditions of repayment.
- Disburse funds: Disbursement typically occurs within one week of signing your final closing documents.
Pros & Cons of SBA Disaster Loans
| PROS | CONS |
|---|---|
| Low interest rates | Can take up to two or more months to get approved |
| Flexible loan terms that can be determined on a case-by-case basis | Interest rates can be higher for businesses that can get financing elsewhere |
| Can provide assistance for physical and economic damages | Application process can be complex with significant paperwork required |
| Deferrals for first payment due date are available | Some loans are only available for businesses that have been denied by other lenders |
| Loans are available to renters and homeowners who are not business owners | |
Bottom Line
SBA disaster loans provide an affordable method of financing to businesses impacted by a declared disaster. Depending on the type of loan you get, funds can help your business continue or resume normal operations. Some examples can include repairing or replacing business equipment, covering business expenses such as healthcare benefits for employees, and making business debt payments. Since it can take up to two months to get approved, it’s important to start the application process early.
