SBA disaster loans aid commercial property owners in distress

By ,
Ask a Lender
September 21, 2017


Key Points

About the Small Business Administration's disaster loans

  • The SBA’s Business Physical Disaster Loans program applies to commercial property owned by businesses of any size.
  • Loans of up to $2 million are available through the program to restore or replace property damaged during a disaster.
  • Borrowers also may be eligible for loans to pay for improvements to reduce the risk of future property damage caused by a similar disaster.
  • Loan candidates have 60 days to apply for a loan starting from the date a disaster is declared.

If your commercial property is destroyed or damaged in a natural disaster, the federal government offers some help in the form of low-interest loans.

The Federal Emergency Management Agency (FEMA), the U.S. Department of Agriculture (USDA) and the U.S. Small Business Administration (SBA) all offer loans or grants to cover commercial property losses in natural disasters. FEMA grants cover immediate needs, such as clothing and vehicles; the USDA offers loans primarily to farmers and farm owners; and SBA lending is the primary government source of long-term disaster-recovery funding not provided by private insurers.

The best-known type of disasters eligible for SBA loans are those declared by the president, in response to a flood, hurricane, tornado, earthquake, forest fire or other natural calamity. But the SBA is authorized to make its own disaster declarations, usually in response to smaller disasters in which as few as 40 homes and businesses experience substantial uninsured damage.

The SBA offers a variety of disaster-loan packages to individuals as well as businesses. The program that applies to commercial property is called SBA Business Physical Disaster Loans. Under it, a business of any size and most private nonprofit organizations that are located in a declared disaster area may apply for loans of up to $2 million to replace damaged property, or restore property to its pre-disaster condition.

The terms of the loans vary depending on the amount of credit that is available elsewhere, but interest rates range from 4 percent to 6 percent, and loan terms can be as long as 30 years. Typically, prospective borrowers have 60 days from the disaster declaration to apply for loans, although the deadline is often extended.

In addition to replacing and repairing commercial real estate, the loans can be used to cover machinery, equipment and inventory losses. Borrowers also can apply for loans of up to 20 percent of their damage claim to pay for improvements that reduce the risk of future property damage caused by a similar disaster.

The loans are intended to cover disaster-related damages to uninsured or underinsured property, and to assist borrowers who are required to apply insurance proceeds to an outstanding mortgage on the damaged property. Often, prospective borrowers don't know whether insurance will cover their damages, or how large an insurance settlement to expect. When that's the case, the SBA advises commercial property owners to apply for the loans, rather than miss an application deadline. If the borrower is approved for an SBA loan, any subsequent insurance proceeds can be used to repay it.

The SBA has a much more direct role in the disaster-loan process than in its other small-business lending activities, where private lenders make credit decisions and the agency guarantees their loans. For disaster-relief loans, the agency decides whether a loan is in order after gathering extensive information about the disaster damage and applicants' credit history.

During the loan-application process, SBA staff members assess property damage, conduct credit checks and evaluate applicants' financial information. They also investigate whether prospective borrowers have evaded child-support payments or defaulted on federal student loans, and also determine whether an applicant is likely to secure credit from nongovernment lenders. There is no standard collateral requirement, but the agency seeks collateral "to the extent possible" for all commercial loans exceeding $25,000 that are authorized under a presidential disaster declaration, and for commercial loans exceeding $14,000 granted under an agency declaration.

Those with damage claims can apply online for a Business Physical Disaster loan, after which an SBA inspector will contact applicants. Before the process begins, the agency requires a completed loan application and a signed and dated IRS Form 4506-T, which gives the IRS permission to share applicants' tax information with the SBA.

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