SBA Disaster Loans: What You Need to Know

how to get a disaster loan

From hurricanes to volcanic eruptions, natural disasters have become all too common. If you’ve ever been through one, you know that your home or business can go from thriving to destroyed in a matter of hours. When disaster strikes, SBA disaster loans can help small business owners, nonprofit organizations, homeowners, and renters get back on their feet.

How Do SBA Disaster Loans Work?

Offered by the U.S Small Business Administration, SBA disaster loans are low-interest loans that can be used to repair and replace damaged property.

While small business owners often use SBA disaster loans, you don’t have to own a business to qualify for one. Homeowners and renters are also eligible for SBA disaster loans. You just have to live in a declared disaster area.

Keep in mind that disaster loans are meant to restore a property to its original state before the disaster, so they can’t be used to make improvements to a property. However, you might be eligible for a 20% increase in your loan amount to make improvements that are meant to prevent damage from future natural disasters.

What Are the Types of SBA Disaster Loans?

Several different types of SBA disaster loans exist with different purposes, qualification requirements, and loan amounts. Read on to find out which one is best for you.

  1. Home and Personal Property Loans If your home or other personal property were damaged in a natural disaster, you could apply for a home and personal property loan with the SBA. Homeowners may qualify for loans of up to $200,000 that can be used to replace a primary residence, and both homeowners and renters may qualify for loans of up to $40,000 to replace personal property, which includes items like furniture, clothing, appliances, and cars.

  2. Business Physical Disaster Loans Business owners, nonprofit owners, and owners of rental properties can apply for a business physical disaster loan. Business and nonprofit owners may qualify for up to $2 million to repair and replace anything from machinery, equipment, and inventory to the property itself.

  3. Economic Injury Disaster Loans Small businesses, agricultural cooperatives, and private nonprofit organizations may qualify for economic injury disaster loans to recoup economic losses due to a natural disaster. You’ll need to demonstrate that you’ve suffered a substantial economic injury that’s rendered your business incapable of meeting its financial obligations. Loans range up to $2 million and can be used to cover bills and other expenses that would usually be covered if not for the disaster.

  4. Military Reservist Economic Injury Loans Similar to economic injury disaster loans, military reservist economic injury loans are designed to help business owners cover expenses and financial obligations they’re usually able to meet. The main difference is that the loan is specifically for businesses that can’t pay regular expenses because an essential employee, who is also in the military reserve force, was called into active duty. The maximum loan amount is $2 million.

Pros and Cons of SBA Disaster Loans

SBA disaster loans can certainly provide business owners, homeowners, and renters with a good deal. However, you should consider these important factors before diving into an application for one.

Pros

  • Low interest rates
  • Long repayment periods
  • No additional fees

Cons

  • Lengthy approval process
  • Lots of paperwork
  • Credit score requirements
  • Potential collateral requirement

The best feature of SBA disaster loans might be their interest rates. Interest rates range from 4% for borrowers who can’t access credit elsewhere to 8% for borrowers who can. Repayment terms also tend to be quite long, with the maximum on all SBA disaster loans being 30 years. Remember that a lengthy repayment period may mean lower monthly payments, but it also means you’ll spend more on interest fees over the length of the loan. You won’t have to worry about application and loan origination fees.

On the other hand, the approval process for an SBA disaster loan can take a while as it requires a lot of paperwork, so if you need money immediately, it may not be the best option. For a quicker process, you might want to consider an online lender or a business credit card.

If you’re looking to borrow more than $25,000, you’ll likely need to secure the loan with collateral. Finally, while the credit score requirements for an SBA disaster loan aren’t necessarily any more strict than those at a traditional bank, the SBA does review your credit history. About 50% of the applications they receive aren’t approved, and often that is due to low credit scores. Folks with poor credit should consider borrowing money from friends and family or looking into online lenders who consider more than just your credit score, although they’ll often charge higher interest rates.

SBA disaster loans offer a helping hand to businesses and homeowners experiencing loss from a natural disaster. If you’ve gone through a natural disaster, the worst part is over. Know that physical property damage can be recovered, and if you need help paying for that recovery, you have options.


Written by Elizabeth Aldrich

Elizabeth is a freelance writer covering personal finance, business, and travel. Her writing has appeared in The Motley Fool, Business Insider, Yahoo! Finance, LendingTree, Student Loan Hero, FOX Business, and more.

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