SBA Disaster Loans: What to Know
A natural disaster or emergency can cause a significant disruption in business revenue. The SBA offers disaster loans with relatively low interest rates to help businesses meet expenses and assist in rebuilding.
What is an SBA disaster loan?
Disaster loans are loans offered by the U.S. Small Business Administration (SBA) to provide emergency assistance after a natural disaster or emergency occurs, including hurricanes, wildfires 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. Though funding timelines can vary, the SBA strives to make loan decisions within one to three weeks. Once approved, the funds are typically distributed within five business days.
While SBA disaster loans are designed to help individuals, nonprofits and businesses recover from declared disasters, it’s important to note that these debts must be repaid with interest by the end of the loan term. The SBA is not authorized to forgive disaster loans, with the exception of special situations such as the congressionally authorized Paycheck Protection Program (PPP) in 2020. The PPP loan program is now closed, but existing borrowers may still be eligible to apply for forgiveness.
You 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.
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. These loans don’t accrue interest for the first 12 months — after that, your interest rate depends on the purpose of the loan.
Type of disaster loan | Maximum loan amount | Maximum term length | Estimated interest rate | Collateral required? |
|---|---|---|---|---|
Physical damage loan | Businesses: $2 million Homeowners: $500,000 Renters: $100,000 | 30 years | 0% first year, then 4% to 8% | Yes, for loans above $50,000 in Presidential declarations and $14,000 in agency declarations |
Economic injury disaster loan | $2 million | 30 years | 0% first year, then 4% | Yes, for loans above $50,000 |
Military reservist economic injury disaster loan | $2 million | 30 years | 0% first year, then 4% | Yes, for loans above $50,000 |
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 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 paying rent or utilities or making required payments on pre-existing loans. EIDL assistance is typically only available to small businesses that cannot obtain credit elsewhere.
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 military reservist employees are called to active duty. These loans may be used for operating expenses, but not to replace profits or refinance 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.
When a natural disaster like a hurricane or wildfire causes such severe damage 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. You can find the latest information about declared disasters on the SBA’s disaster assistance page.
SBA disaster loan requirements
Businesses of all sizes can apply for an SBA disaster loan. To qualify for one of these loans, your business will need to have operated and sustained damage in a declared disaster area. You’ll also need to apply within the program deadline. For physical damage loans, this is typically within 60 days of the disaster declaration. For EIDLs, you may have up to nine months after the disaster declaration to apply.
In addition, these standard SBA eligibility requirements also apply to disaster loans:
- Loans over $200,000 require a personal guarantee from every individual who owns more than 20% of the business.
- Your personal and business credit scores will be considered acceptable by the SBA.
- The business must provide an Employer Identification Number (EIN) and the applicant must be a U.S. citizen, non-citizen national or legal alien. Individual applicants must provide a Social Security number or proof of non-citizen national or qualified alien status.
- The business cannot operate in SBA-excluded industries such as gambling, adult entertainment or insurance.
How to get an SBA disaster loan
Follow these steps to get an SBA disaster loan:
- Confirm your business is in a disaster area: Check to make sure your geographical area is on the SBA Disaster Loan Assistance list.
- 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.
- Apply online: Complete the SBA disaster loan online application. Be prepared to provide information about your business and its owners, including your EIN, financial information, insurance information and Social Security numbers for all applicants.
- 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.
Alternatives to disaster loans
If you don’t qualify for a disaster loan — or you can’t afford to wait for the SBA to review your application — there may be alternative options you can consider to cover critical expenses as you rebuild after a physical or economic disaster.
Alternatives if you don’t qualify for a disaster loan
While SBA disaster loans are a valuable resource, not everyone qualifies. Several factors can impact your eligibility, including your location, your credit score and your business assets, if collateral is required. If you don’t qualify for a disaster loan, you might want to consider these alternatives:
- Crowdfunding: Platforms like Fundable or Kickstarter can be helpful for raising funds from family, friends and even strangers. For the best odds, clearly explain your situation and how the funds will be used for recovery. Keep in mind that it may take some time to raise the necessary funds, and crowdfunding platforms may charge a fee for these services.
- Business credit cards: While not ideal for large expenses, a business credit card may provide temporary relief during a rough patch. Credit cards tend to be easier to qualify for, but in exchange, you’ll pay more in interest than you would with a business loan. To keep interest costs low, look for cards offering 0% APR introductory offers.
- Personal loans: If your business is too new to qualify for financing, a personal loan may be the answer. These loans can be used for a variety of purposes and can be easier to obtain than an SBA loan, especially if you have a decent credit score. However, personal loans often come with higher interest rates and you’ll be personally liable if you’re unable to repay your debt.
Alternatives if you can’t wait for a disaster loan
As we’ve covered, the SBA may take up to three weeks to review and approve your disaster loan application. If you can’t afford to wait this long for financing, you may need to look into other options to hold your business over.
Many alternative lenders offer business loans with fast funding, allowing you to receive your funds as soon as the same day you apply. However, these short-term loans tend to have hefty fees and interest rates, so this is only a good option if you’re confident in your ability to repay the loan without putting additional financial strain on your business. For example, seasonal businesses heading into their busy season may be able to justify a short-term emergency loan if they expect to make more in profit than they will spend in interest.
Frequently asked questions
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.
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