Pros and Cons of SBA Disaster Loans
Insurance may pay for some of it, but there’s a good chance there will be a gap. Thus, to fully afford to rebuild your business, you’re going to need additional capital.
Due to this, a disaster loan from the Small Business Administration (SBA) may be a viable option. However, as with any financial decision, you should carefully weigh the pros and cons of SBA disaster loans before you apply.
In this post, we’ll review those pros and cons, so you can make a quick, well-informed decision about how to pay for your business’s disaster recovery.
What is an SBA Disaster Loan?
If your business is damaged or destroyed due to a hurricane, flooding, fire, or drought, you could qualify for a SBA Disaster Loan.
To qualify, you’ll need to prove that your business is in a declared disaster area. In addition, the SBA will want to know how your business has been negatively affected by this disaster. For example, if you have damaged property or need to repair or replace equipment.
Pros of SBA Disaster Loans
1. Affordable with Relatively Lenient Terms
Compared to other working capital options, SBA Disaster Loans will likely be among your most affordable financing options. In fact, if you meet the eligibility requirements, the interest on your SBA disaster loan won’t exceed four percent.
A physical disaster loan from the SBA, on the other hand, carries a maximum loan amount of $2,000,000 and may be paid back over 30 years.
2. High Maximum Loan Amounts
Disasters can be extremely expensive. In addition to the cost of replacing destroyed property or equipment, you’ll need to make up for downtime caused by the disaster.
Without enough financing, you’ll be forced to allow any debts to accumulate interest. That’s why the fact that SBA loans have a maximum of $2,000,000 is a significant advantage for your business. You may not need the full amount, but having that flexibility ensures you’ll have what you need to get back on your feet quickly.
3. Flexible Usage of Funds
The SBA’s disaster loans can help you pay for just about anything you need to afford after a disaster. For example, the Business Physical Disaster Loan can be used for real estate, personal, property, machinery, equipment, fixtures, improvements, and leasehold improvements.
Also, with an Economic Injury Disaster Loan, you can use the funds to meet your financial obligations and pay for operating expenses that could’ve been met if the disaster hadn’t occurred.
Cons of SBA Disaster Loans
1. Eligibility and Affordability Depend on Your Alternatives
If you can obtain financing elsewhere, you won’t be eligible for certain SBA Disaster loans. For the disaster loans you’re eligible for, you’ll likely be charged a higher interest rate of up to eight percent. You should also keep in mind that the SBA will determine whether you can obtain financing elsewhere.
2. Eligibility Depends on Location
The SBA provides disaster loans to businesses that have been affected by a disaster. To be eligible for an SBA Disaster Loan, your business must be located within an area that’s in a Presidential or SBA Agency Declared disaster area.
3. Difficult to Qualify For
Unlike typical business loans, SBA disaster loans are relatively difficult to qualify for. As mentioned, if you have alternatives or you aren’t located in a disaster area, you may not be eligible. Plus, the application process can be complicated and competitive. In addition to standard application documentation, you’ll need to file documents that authorize the IRS to release your tax information to the SBA.
Next Steps: Is an SBA Disaster Loan Right for Your Business?
If you’re eligible for an SBA disaster loan, you should consider it as an option. Still, you should keep in mind that the application process is fairly complicated and uncertain. While you may believe that you don’t have any other financing options, the SBA may think differently.
If you go through the entire application process only to be turned down, you’ll have wasted precious time that could’ve been spent rebuilding your business. After you carefully weigh the pros and cons mentioned in this post, evaluate your other potential financing options so that you can make the most affordable and timely solution for your company.
Did you apply for an SBA loan after a disaster? How did their disaster assistance financing benefit your business? Tell us about it in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.