Disaster loans are often made available by the Small Business Administration when an officially declared disaster has happened, primarily natural disasters. These loans are made available to private businesses as well as non-profits, regardless of size to repair or replace damaged property. If your property wasn’t damaged, working capital loans are also made available to help recover from the economic injury caused by the disaster.
Physical disaster loans are made available up to $2 million to support the repair or replacement of physical property and equipment. The loan may also be increased by as much as 20 percent of the total amount of physical loss to protect against the same damage happening again from future disasters of similar nature. The loan will be able to cover losses that aren’t covered by insurance or losses that are underinsured which means you can’t use the loan to replace making an insurance claim on insured items. A good example of the types of common disasters that make disaster loans available are hurricanes, flooding, and tornados.
Economical disaster loans are made available to private and non-profit organizations who suffered a major impact on their revenue due to any disaster that didn’t cause physical damage. These loans can be made up to $2 million to help meet any necessary financial obligations and help cover expenses the business would normally pay if the disaster didn’t occur. An example of an economic disaster would be draught in agricultural areas, wildfires that cause major evacuations, etc.
Disaster loans have some added benefits but also come with some additional requirements that can prolong the funding process. The SBA will make exceptions for businesses that wouldn’t normally be allowed through an SBA 7(a) loan due to SBA or bank requirements. The main exception is construction for repairs needed without going through the traditional construction loan process which is very lengthy and time consuming. Below is a list of pros and cons of an SBA disaster loan versus a traditional SBA 7(A) loan.
- Lower interest rates that typically won’t exceed 4%
- Less stringent personal requirements to qualify
- Expanded eligible use of proceeds compared to a traditional bank loan
- SBA must send an inspector to estimate the cost of the damage which can take significant time
- Loans over $25,000 must be secured with collateral to the extent possible
- Only available in limited geographical areas for a short amount of time.