SBA Disaster Loans: What to Know
A natural disaster or emergency can cause a significant disruption in business revenue. The SBA offers disaster loans to help businesses meet expenses and assist in rebuilding. Unlike other loans offered by the Small Business Administration, SBA disaster loans have a fast-track approval process and customized terms for the applicant’s situation.
What is an SBA disaster loan?
Disaster loans are loans offered by the U.S. Small Business Administration (SBA) to provide businesses, nonprofits and individuals emergency assistance after a natural disaster or other emergency occurs, including hurricanes or even civil unrest. SBA disaster loans help bridge the gap between emergency needs and payments from other sources like FEMA or your business insurance.
Small businesses can use funding from SBA disaster loans for replacing equipment, paying critical operating costs, upgrading buildings to avoid future disasters or covering expenses resulting from an employee being called to active military duty. The funds can also be used to cover general operating expenses that otherwise would have been met, had the disaster not occurred.
Types of disaster loans
SBA disaster loans come in different types, which can be used for different purposes. Types of disaster loans include: physical damage loans, Economic Injury Disaster Loans (EIDL) and military reservist loans.
| Type of disaster loan | Maximum amount | Maximum term length | Estimated interest rate | Collateral required? |
|---|---|---|---|---|
| Physical damage loan | Businesses: $2 million Homeowners: $200,000 Renters: $40,000 | 30 years | 0% first year, then 4% to 8%* | Businesses: Yes, for loans above $25,000 Homeowners and renters: Yes, for loans above $14,000 with an agency declaration |
| Economic injury disaster loan | $2 million | 30 years | 0% first year, then 4%* | Yes, for loans above $25,000 |
| Military reservist economic injury disaster loan | $2 million | 30 years | 0% first year, then 4%* | Yes, for loans above $50,000 |
*The SBA offers a 12-month 0% interest rate on all disaster loans approved through September 30, 2023.
Physical damage loans
Businesses of any size, including nonprofits, can use physical damage disaster loans to repair or replace physical business assets damaged by the disaster. These assets could include land, buildings, equipment, vehicles or inventory, for example.
Physical damage disaster loans are also available for individuals or homeowners to replace or repair their primary residence and personal property.
Economic injury disaster loans (EIDL)
Small businesses, nonprofits and small agricultural cooperatives can use EIDLs to pay for necessary operating expenses until normal operations are reestablished. For example, an EIDL can be used for rent, utilities or to make required payments on pre-existing loans.
The COVID-19 EIDL program, established to help small businesses recover from the COVID-19 pandemic, is no longer accepting applications.
Military reservist disaster loans
Military reservist loans are a specific type of economic injury disaster loan designed to help businesses recover from financial hardships when their employees return to active duty. These loans may be used for operating expenses, but not to replace profits or make payments on other loans.
Mitigation assistance
Mitigation assistance loans increase the amount of an approved SBA disaster loan by 20% to pay for improvements that make buildings or equipment less susceptible to future disaster damage. Projects can range widely from structural reinforcements to relocation or even changes in landscaping.
Hurricane assistance
When a hurricane causes such severe damage to property and businesses that a federal disaster is declared, the SBA issues a special fact sheet stating what geographical area is affected, what types of disaster loans are available and how to apply.
SBA disaster loan requirements
To qualify for an SBA disaster loan, you need to meet the following criteria:
- Operate your business and have had damage in a declared disaster area
- Any size business, a nonprofit or an individual can apply for a physical damage loan, not just a “small” business by SBA standards
- Apply within the program deadline:
- Physical damage loans: 60 days from disaster declaration
- EIDL: Nine months from disaster declaration
In addition, these standard SBA eligibility requirements also apply to disaster loans:
- Loans over $200,000 require a personal guarantee from every owner of more than 20% of the business.
- Business credit score must be considered acceptable by the SBA.
- Business must provide an Employer Identification Number (EIN) and must be at least 20% owned by U.S. citizens, non-citizen nationals or qualified aliens. Individual applicants must provide a Social Security number or proof of non-citizen national or qualified alien status.
- Business cannot be in SBA-excluded categories such as gambling, adult entertainment or insurance.
Thing to knowYou can apply for multiple types of disaster loans if they apply to your situation. Once you receive a loan you can also apply for mitigation assistance to make property improvements that may ward off future disasters.
How to get an SBA disaster loan
Follow these steps to get an SBA disaster loan.
1. Confirm your business is in a disaster area.
Check to make sure your geographical area is on the SBA Disaster Loan Assistance list.
2. Decide what type of disaster loan is appropriate for you.
Choose one or more loans to apply for based on your situation: a physical damage business loan, an economic injury loan, a military reservist loan, and/or a personal property damage loan.
3. Apply online.
Complete the SBA disaster loan online application. Provide an IRS Form 4506-T giving the SBA access to your tax records, plus an income statement, schedule of debts and most recent tax return.
4. Prepare for SBA inspection.
Once you’ve submitted your application, the SBA will send an inspector to verify your damages.
Remember, SBA disaster loans are not a substitute for insurance coverage: They are intended to fill the gap between your emergency needs and the timing or limitations of insurance payments. Understanding how much business insurance costs and making sure you have the right types of policies in place will help to keep you prepared for the unexpected.
Frequently asked questions
Yes, SBA disaster loans are debts which must be paid back with interest.
SBA disaster loans can be used to repair or replace damaged physical assets, pay extraordinary operating expenses and fill short-term, working-capital needs directly related to the impact of a declared disaster.
No, the SBA is not authorized to forgive disaster loans, except in special situations such as the congressionally authorized Paycheck Protection Program (PPP) in 2020. Although the PPP loan program is closed, existing borrowers may be eligible to apply for forgiveness.
If you received a personal loan as a homeowner or renter it will appear on your credit report. If you received a business loan, it won’t appear on your personal credit report, even if you personally guaranteed the loan.
However, the SBA pulls a credit report for the individual who files the business loan application, and this will appear on your personal credit report as an inquiry. Additionally, if the loan defaults, the SBA may report it to credit agencies as a default by both the business and the individual who completed the application.
The SBA targets making disaster loan decisions within three weeks of application submission, and starting disbursements within five business days of loan approval.