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Small Business Disaster Recovery Loans

Natural disasters can devastate a small business -- especially for those without adequate insurance coverage. But the Small Business Association (SBA) grants loans to businesses that have suffered tangible losses due to a natural disaster. The maximum limit on real estate damage is $200,000, and the amount you can borrow depends on the actual cost of repairing or replacing your property, less any money received from insurance companies, other reimbursements, or grants.

To apply, you must complete an application and furnish an itemized list of property losses and costs to repair or replace each item. You will also need to submit your last two federal income tax returns. Once you have submitted the application, an SBA loss verifier will come inspect the extent of the damage and determine the reasonableness of your loan request.

If you require a loan of more than $10,000, you must provide collateral to the extent it is available. Typically the collateral would consist of a first or second mortgage on the damaged property. Personal guarantees from business owners also are required for loans over $10,000. If you cannot provide collateral, that doesn't mean your loan will automatically be declined; these decisions are made on a case-by-case basis. You must pledge any available collateral, however.

While the SBA processes disaster recovery loans as quickly as possible, they are not a disaster relief organization like the Red Cross. Common sense dictates that the faster you return your application, the faster the SBA can process it and disburse funds.

Another benefit of an SBA disaster-recovery loan is that the loan terms are flexible. There is no set minimum payment, and payment amounts vary upon income, expenses, and other circumstances that may affect your repayment ability. The SBA understands that it will take your business some time to regain its footing; for this reason, they don't require you to begin making payments until five months or so after the loan is issued.

If repaying the disaster-recovery loan while also making mortgage payments is a hardship, you may be able to refinance though the SBA. To qualify, you must have sought credit elsewhere and been declined. Also, your property must have sustained damage of 40 percent or more of its value and you must intend to repair the damage.

There are, however, limitations on these types of loans. Disaster recovery loans are made to help you restore your business to its former condition. You may not use them to cover personal pleasure boats, planes, recreational vehicles, antiques, or collections.

When a natural disaster occurs, many businesses and homes in your area may have been damaged, so it may take a while for insurance companies and contractors to calculate settlements and provide estimates. Fortunately the SBA does not require applicants to include contractor estimates for repairing or replacing property; an inspector will verify the extent of the damage when your claim is reviewed.

As noted above, disaster recovery loans may be used only for the amount of damage you incur. Therefore, if you receive an insurance settlement after your loan is issued, you must turn over those funds to the SBA to reduce the amount of the loan.

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