Disaster Assistance Loans

Disaster assistance loans are utilized by businesses to recover from floods, fires, earthquakes, tornadoes, etc. that damage one or more aspects of their operations, from physical structure to inventory to lost business. Of course, adequate insurance policies offer the best protection for small business owners, but many businesses do not maintain adequate coverage. Small businesses are particularly reliant on disaster loans since they can not draw on the corporate coffers to which larger firms often turn. Some small business owners solicit loans from banks and other lending institutions in the wake of a natural disaster, but many others turn to loan programs offered by the Small Business Administration (SBA) and other federal agencies. Indeed, the SBA is a primary source of funding for businesses seeking to rebuild after a disaster strikes.

Any business that qualifies under SBA definitions as a "small business," is located in a major disaster area, and has suffered damage as a consequence of that disaster may apply for assistance. The assistance is earmarked in two ways. First, as help to repair or replace damaged property. Second, as help to meet those financial obligations that it would have been able to honor had a disaster not taken place. The SBA maintains separate programs for each of these eventualities. The agency notes, however, that qualification for an SBA disaster relief loan is not a given. "The SBA disaster relief program is not an immediate emergency relief program such as Red Cross assistance, temporary housing assistance, etc.," according to the agency. "It is a loan program to help you in your long-term rebuilding and repairing. To make a loan, we have to know the cost of repairing the damage, be satisfied that you can repay the loan, and take reasonable safeguards to help make sure the loan is paid."

Physical Disaster Business Loans

The SBA makes physical disaster loans of up to $1.5 million to qualified businesses, provided that the businesses use this money for the repair or replacement of real property, equipment, machinery, fixtures, inventory, and leasehold improvements. This property may have been insured or uninsured prior to the disaster. "In addition," noted the SBA, "disaster loans to repair or replace real property or leasehold improvements may be increased by as much as 20 percent to protect the damaged real property against possible future disasters of the same type." This latter allowance can be particularly attractive to victims of natural disasters that tend to occur on a cyclical basis. Finally, some businesses can use this money to relocate, although the SBA cautions business owners not to formally commit to such plans before gaining loan approval. The SBA points out that the disaster loan is "made for specific and designated purposes. Remember that the penalty for misusing disaster funds is immediate repayment of one and a half times the original amount of the loan. The SBA requires that you obtain receipts and maintain good records of all loan expenditures as your restore your damaged property, and that you keep these receipts and records for three years."

Applications for these loans require the business to file a variety of financial and other records, including an itemized list of losses (with estimated replacement/repair cost), federal income tax information, history of the business, personal financial statements, and business financial statements. Whereas loans of less than $10,000 require no collateral, loans of amounts greater than that require the pledging of collateral to the extent that it is available. The SBA notes that while it will not decline a loan solely for lack of collateral, it does require businesses to pledge collateral when it is available.

Interest rates on physical disaster loans vary, depending on whether or not the applicant is able to obtain credit with other financial institutions. In instances where the business is not able to obtain credit elsewhere, U.S. law sets a maximum interest rate of 4 percent per year on these loans, with a maximum maturity of 30 years. Businesses that would be able to secure credit elsewhere, however, do not get quite so advantageous terms. For these latter enterprises, the interest rate is either 8 percent or whatever is being charged in the private sector at the time, whichever is less. The maturity of these loans cannot exceed three years. Nonprofit organizations can secure better interest rates and maturity terms through the SBA than can for-profit businesses.

Economic Injury Disaster Loans

The EIDL loan program is available to small business and small agricultural cooperatives that have suffered substantial economic injury resulting from a physical disaster or an agricultural production disaster. The SBA defines "substantial economic injury" as "the inability of a business to meet its obligations as they mature and to pay its ordinary and necessary operating expenses." In essence, it gives companies an opportunity to catch their breath in the wake of a disaster.

EIDL assistance is available only to those entities that are unable to secure credit from other private sources (banks, etc.). It is used less often than the physical disaster loan option for several other reasons as well:

1. The SBA limits its total assistance to any one company to $1.5 million, no matter how many programs are utilized. This means that a business that secures a $1.5 million loan for facility repair through the SBA's physical disaster business loan is not eligible for any funds through EIDL.
2. The SBA puts limitations on how EIDL funds can be used. For instance, these funds can not be used to pay cash bonuses or dividends, or for disbursements to owners, partners, officers, or stockholders who are not directly related to the performance of services for the business.
3. Finally, EIDL loans do not give the borrower any leeway in the realms of relocation or physical improvements, both of which are sometimes possible through the SBA's physical disaster loan program.

In many other respects, however—determination of interest rates, penalties for misuse of funds, use of collateral, procedures for securing a loan, etc.—the procedures for EIDLs are largely the same as those for physical disaster business loans.

SBA Loans and Flood Insurance

According to the SBA, if damage is caused by flooding, or the business is in a special flood hazard area, the business seeking the SBA loan must have flood insurance before the agency will disburse the loan. If the business was legally required to maintain flood insurance but did not, then the SBA will not grant a disaster loan.

Disaster Loans for Personal Property and Homes

The SBA also maintains loan programs for homeowners, renters, and/or personal property owners who are victimized by a disaster. Personal property loans of up to $40,000 are available to individuals, homeowners, or renters to help repair or replace personal goods (boats, automobiles, clothes, appliances, furniture, etc.). Real property loans of up to $200,000, meanwhile, are available to homeowners for replacement or repair of actual homes. These loans may not be used for home upgrades or additions, but can be targeted toward making structural improvements necessary to meet city or county building codes. Second homes and vacation homes are not eligible for these loans.

TERRORISM, ECONOMIC CHANGE, AND NATURAL DISASTERS

The SBA has seen a lot of activity since the 9/11 terrorism attacks of 2001, the economic changes wrought by 9/11 in the airline industry, and increasing hurricane events culminating in the record-breaking 2005 season. Developments in the airline industry caused in large part by the growth in Internet-based online ordering of tickets came to a head early in 2001 when the commercial carriers discontinued paying commission on ticket sales to travel agencies; this shock to that industry, in combination with the drastic slow-down in travel after 9/11 and the on-rush of a recession in the wake of the attack, caused enormous economic hardship for travel agencies. Many travel agencies sought disaster loan assistance from the SBA with little experience in dealing the agency; at the same time, SBA had to master the peculiarities of travel agencies to assess how best to help them.

According to NASA, in an article titled "2005: A Hurricane Season 'On Edge'," "Millions of lives were changed by the record-setting 2005 Atlantic hurricane season—a 'worst case scenario' for the United States. The 27 named tropical storms beat the old record of 21 in 1933. Five hurricanes (Dennis, Katrina, Ophelia, Rita and Wilma) and three tropical storms (Arlene, Cindy and Tammy) directly impacted the country: destroying lives, demolishing homes and wrecking the landscape." Katrina was the costliest hurricane in U.S. history; Wilma and Rita both made the top ten. Tens of thousands of small businesses were affected. Katrina hit on August 29, 2005. As of February 2006, the SBA had approved $1.05 billion in loans to 12,455 Florida and Gulf Coast businesses, on average $84,000 per business. These businesses were at least able to get help. Many others will close their doors forever.

BIBLIOGRAPHY

National Aeronautics and Space Administration. "2005: A Hurricane Season 'On Edge'." Available from http://www.nasa.gov/vision/earth/lookingatearth/2005hurricane_recap.html. Retrieved on 14 February 2006.

"SBA Assistance Tops $1.5 Billion." Mississippi Business Journal. 2 January 2006.

U.S. Small Business Administration. "Economic Injury Disaster Loans for Small Business" Available from http://www.sba.gov/disaster_recov/loaninfo/phydisaster.html. Retrieved on 14 February 2006.

U.S. Small Business Administration. "Home and Personal Property Disaster Loans." Available from http://www.sba.gov/disaster_recov/loaninfo/property.html. Retrieved on 14 February 2006.

U.S. Small Business Administration. "Physical Disaster Business Loans." Available from http://www.sba.gov/disaster_recov/loaninfo/phydisaster.html. Retrieved on 14 February 2006.

U.S. Small Business Administration. "SBA Approves Over $1 Billion In Disaster Loans To Businesses Affected By 2005 Hurricanes." Press Release. 13 February 2006.

                                  Hillstrom, Northern Lights

                                   updated by Magee, ECDI