The loss of revenue that comes along with disasters can be more than enough to kill off a business of any size, since the narrow margins leave little room for emergency savings beyond the short term. In response to the imminent threat of such catastrophes, the Small Business Administration (SBA) provides loans for those affected by related damage, evacuation, or business closures. 

Most recently, SBA disaster loans were made more widely available for small businesses affected by COVID-19 as part of the CARES Act (signed into law on Friday, March 27, 2020). The Coronavirus Relief Bill (signed December 27th, 2020) allocated an additional $20 billion for SBA Economic Injury Disaster Loans (EIDL) Grants to businesses in low-income areas who demonstrate economic hardship due to the pandemic.

Check the SBA website to see updated information regarding disaster zones throughout the country.

What is an SBA disaster loan?

A disaster loan from the Small Business Administration is a low-interest loan offered at a point of extreme need with the aim of helping small businesses stay open and retain their property and other assets.

SBA disaster loans are for small businesses, non-profit organizations, homeowners, and renters who may be experiencing financial hardship due to an acute circumstance beyond their control—usually a catastrophe or disaster. These loans may help cover a gap in insurance coverage, or simply provide a sustaining financial bridge until insurance claims can be processed and funds dispersed. 

In cases like the current environment, where the disaster may not be covered by insurance, the SBA specifically administers loans through the Economic Injury Disaster Loan program.

Economic Injury Disaster Loan program

The Economic Injury Disaster Loan program (EIDL) provides funding in the form of loans up to $2 million depending on the needs of the business. Repayment terms are usually crafted to meet the needs and ability of the business as well. 

Rather than covering the physical injuries caused by a disaster, EIDL covers the economic losses. For example, if your business sustained significant damage during a disaster (flood, tornado, etc.), then the loan may cover repairs, losses, as well as lack of income during the disaster and rebuilding period. 

On the other hand, if your business wasn’t physically damaged by the disaster, but was closed or inaccessible (as is the case with current coronavirus quarantines), the loan may cover the costs of business income you lost due to the disaster conditions. 

State Governors can make Presidential or Agency requests that an area be considered to be affected by disaster. Secretaries of Agriculture, Commerce, or even military entities can also declare disasters based on circumstances that are damaging to the public. 

For more information about how disasters are classified and declared, turn to FEMA.

According to FEMA, COVID-19 is  a “disease or pandemic” which qualifies as the kind of disaster for which small businesses may appeal to federal and state governments for assistance.

What are the requirements for an SBA disaster loan?

The Small Business Administration (SBA) is a United States government agency created to support small businesses. While the SBA offers loans year round, they provide additional financial support in response to disasters. 

While the SBA aims to be generous and helpful with loan assistance, in the case of disasters like the coronavirus pandemic there are strict requirements for qualifying businesses (in order to allow the SBA to help as many companies as possible).

SBA disaster loan requirements

There are four main considerations for an SBA disaster loan: location, credit score, repayment ability, and available collateral.

Location

To qualify for an SBA disaster loan you must operate a business located within a declared disaster zone. This might include a city, county, state, or country depending on the nature of the disaster. 

Check the SBA website for a current list of areas that have been officially declared disaster zones to determine if you fall in a qualified area. 

Credit score requirements

In order to qualify for an SBA disaster loan, the Small Business Administration will perform a routine credit check to ensure you qualify against the SBA’s credit score requirements. As with any loan, the lender is assuming a risk and credit checks help lenders to be informed and to mitigate those risks. 

According to Fundera, SBA loan minimum credit requirements fall around 620-640.

If you have bad credit, or your small business credit score isn’t stellar, the SBA will still consider other factors, such as recent income and your history of rent, utilities, insurance, and other payments, to determine whether you qualify for an SBA disaster loan. Also, consider other business loan options.

Repayment

Do you have to pay back SBA disaster loans?

If you receive an EIDL grant (available under the CARES Act or Coronavirus Relief Bill) you are not required to repay the grant. 

If you receive an SBA disaster loan, you will be required to pay back the loan amount plus interest. SBA disaster loans have a 1 year deferment and a 30 year loan term. Your loan will begin accruing interest immediately, but you have no penalties for prepayment.

As with any loan, the lender needs to consider your ability to pay back the loan in full. This will likely be addressed on a case-by-case basis for businesses affected by coronavirus. Some businesses will rebound quickly and be able to repay the loan easily, while others may need more money and more time to adapt to the economic climate created by the pandemic.

Collateral

If you are in need of an SBA disaster loan larger than $20,000-25,000, it is likely that the lender will insist on some form of collateral to complete the loan process. 

Collateral is any property or asset of value that a lender can use to balance the weight of a loan if there is substantial risk. For example, the SBA may consider your business property as collateral for a large loan in the event you were unable to meet the terms of the loan.

Keep in mind—these loans are designed to be as accessible as possible, so don’t be afraid to apply and work with the SBA, even if you have bad credit or lack of collateral.

SBA Emergency Cash Grants were available for small business owners as part of the CARES Act EIDL program but were quickly exhausted and no longer available. The grants available through the Coronavirus Relief Bill will likely be opened mid-January and are only available to small businesses operating in low-income areas.

Targeted EIDL Program with the Coronavirus Relief Bill

A new sub-section of the SBA Disaster Loans program was created by the Coronavirus Relief Bill, which was signed by President Trump on December 27, 2020. The bill targets small businesses in areas that have been particularly hard-hit by the pandemic, aiming to get funds to those who need them most. 

Coronavirus Relief Bill Programs

SBA Disaster Loans

EIDL Grants

Eligibility requirements

  • 25 of fewer employees
  • 30% reduction in revenue
  • Located in a low-income area
  • 25 of fewer employees
  • 30% reduction in revenue
  • Located in a low-income area
  • Special funding available for venues
Funding  The lesser of:

  • Working capital for 180 days OR
  • $50,000

Estimated $1,000 per employee, not to exceed $10,000

45% of 2019 gross revenue available for venues

Interest rates

3.75%

n/a

Term lengths

30 years

n/a

Usage

Strictly dictated by SBA, documentations and approvals required for spending

Not to be used for payments exceeding $100,000 annually to a single employee or independent contractor

Tax & PPP forgiveness Tax-free and does not reduce PPP loan forgiveness eligibility Tax-free and does not reduce PPP loan forgiveness eligibility

How do I get an SBA disaster loan?

The fastest way to apply for an SBA disaster loan is through their online portal. You will be required to complete the disaster loan application as well as submit IRS Form 4506-T (which gives permission for the IRS to release your tax return to the SBA).

However, you ought to consider all of your sources for emergency funding before applying to the SBA, as disaster loans may only apply to businesses without any other options.

SBA disaster loan application process

If you have sustained economic damage and need access to capital, the SBA describes their three step process:

  1. Apply online, in-person, or by mail.
  2. Verify property and loan eligibility.
  3. Receive disbursement of funds. 

While this three step process sounds straightforward, there are various other steps you may need to take to be prepared for the loan review, including verifying eligible disaster zones, estimating your losses and financial need, and compiling your business story and community impact.

Be prepared with the necessary documentation:

  • SBA Form 5 (Business Loan Application)
  • IRS Form 4506-T (IRS Release)
  • Most recent Federal income tax returns
  • SBA Form 413 (Personal Financial Statement)
  • Schedule of Liabilities (may use SBA Form 2202)
  • Additional documentation may be requested, such as income statements, deed/lease information, Employee Identification Number (EIN), monthly sales, etc. 

How long does SBA disaster loan approval take?

SBA disaster loan approvals are expedited, so you can expect your disaster loan to start incremental payments in 1-3 weeks (or seven to 21 days). You will also be assigned a loan officer who will work with you through the duration of your loan.

Online Portal Note: The SBA portal may experience high traffic volume and slow site responses. You may call for over-the-phone assistance at any time: 1-800-659-2955.  Non-peak hours are 7:00pm to 7:00am EDT.

SBA disaster loan terms and rates

Eligible businesses Small businesses and private nonprofits
Max borrowing amount $2,000,000
Term lengths Up to 30 years
Interest rates 3.75% (2.75 for nonprofits)
Fees N/A

*Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay

Disasters which are not considered a physical disaster (such as the coronavirus pandemic versus a tornado or hurricane) fall under the umbrella of Economic Injury Disaster Loans rather than traditional SBA disaster loans. 

You will register on Pay.gov (under 1201 Borrower Payments) in order to schedule your repayment options. Typically, disaster survivors are required to repay SBA disaster loans in full. The terms of the loan and established within your ability to repay.

How can I have my SBA disaster loan forgiven?

What is the SBA Loan Forgiveness Program?

The SBA Loan Forgiveness Program allows qualifying small businesses to forgo some of their loan repayment permanently or for a specified period of time.

The SBA will forgive principal and interest payments up to the amount you spend for two months on the areas that meet SBA loan criteria:

  • Payroll
  • Mortgage interest or rent
  • Utilities
  • Wages and benefits

You will not need to pay back Economic Injury Grant money, but that will count toward your loan forgiveness if you do receive a disaster loan.

How can I use an SBA disaster loan?

If you’re approved for an SBA disaster loan due to economic losses caused by coronavirus, you will begin receiving your funds fairly quickly.  

SBA disaster loans may be used to cover: 

  • Fixed debts
  • Employees paychecks
  • Bills
  • Outstanding invoices
  • Business adaptations (delivery, online/mobile options, etc.)

An SBA disaster loan for coronavirus should be used to cover costs and losses that would not have occurred except for the complications, quarantines, social distancing, and other measures made necessary by the disaster.

Other emergency loan options

Generally, SBA disaster loans will offer you the best rates, terms, and affordable financing. But if you’re looking to get a small business loan for the coronavirus disaster you’ll need to exhaust all other emergency loan options before being approved for an SBA disaster loan. 

The good news is that your small business can receive a coronavirus emergency loan through an alternative lender that will often be easier and faster than the process for an SBA disaster loan. 

In addition to a traditional installment loan, you may consider a one-time line of credit to help cover payroll or business adjustments (e.g. a delivery vehicle) while you wait for coronavirus regulations to expire, or possibly a short term business loan just to get through a couple of weeks.

Pros & Cons of alternative emergency loans

Pros Cons
Easier application process May require higher credit score or specified revenue
Faster approval Shorter term lengths
Faster disbursement Increased repayment frequency
Some may have lower APR Additional fees

Most small businesses have a relationship with a bank or credit union already, so reaching out to your financial institution to discuss options is a smart first step if you are in need of a small business loan to cope with the effects of coronavirus. 

Other options for emergency small business loans include popular lenders like BlueVine, Lendio, and Fundera. Be sure to carefully read all fine print and weigh multiple options before applying for an emergency small business loan to help you survive the coronavirus economic disaster.

How are EIDL loans different from PPP loans?

Both the Economic Injury Disaster Loans (EIDLs) and Paycheck Protection Program (PPP) loans are provided by the SBA, but they offer different solutions to small businesses. In general, EIDLs are targeted towards more long-term funding for any use, while PPP loans are targeted towards short-term relief in order to keep employees on the payroll.

Economic Injury Disaster loans

Paycheck Protection Program loans

Administered by

SBA approved lenders

Eligible businesses

 25 or fewer employees, located in a low-income area

Small businesses with 300 or fewer employees, nonprofits, sole proprietors, and independent contractors

Max borrowing amount

$2 million

First time applicants may borrow the lesser of:

  • $10 million OR
  • 2.5x average monthly payroll costs

Second time applicants may borrow the lesser of:

  • $2 million OR
  • 2.5x average monthly payroll costs
Term lengths Up to 30 years

2 years

Interest rates

3.75% (2.75% for nonprofits)

0.5%

Deferred payments

1 year (under current SBA debt relief plan)

6 months (though interest still accrues)

Forgiveness

N/A

Up to 100%

Use

• Fixed debts

• Payroll

• Utilities and other bills

• Business adaptations and obligations

• Payroll and compensation

• Insurance premiums and healthcare benefits

• Mortgage interest costs

• Rent and utilities

• Interest on other debt obligations

Don’t hesitate to apply

A disaster may have strapped you with unintended consequences, but that doesn’t mean your business needs to wither under the pandemic. Research your options and don’t hesitate to apply for an SBA disaster loan to help your small business survive the economic impact of the disaster at hand and come out on the other side thriving.

We too want to help you survive, thrive, and spend smarter. Learn more about ways your business can save with Divvy—the free expense management platform for small and medium businesses.

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