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How to Get an SBA Coronavirus Disaster Loan

Bob Musinski

Social distancing intended to slow the coronavirus outbreak leaves many small businesses across the country fighting to stay alive. As these businesses scramble to meet payroll and make debt payments, they might get some relief from U.S. Small Business Administration economic injury disaster loans.

SBA loans of up to $2 million can help small businesses when the agency determines that they cannot obtain credit elsewhere. These loans can be used to cover expenses that would otherwise go unpaid because of the economic effects of the coronavirus.

Here's more about how to qualify for an SBA economic injury disaster loan, how you can use one and how to apply.

[Read: Best Small Business Loans.]

What Is an SBA Economic Injury Disaster Loan?

The SBA provides low-interest economic injury disaster loans to small businesses affected by the coronavirus in designated areas. These loans can be used toward fixed debts, accounts payable and other unpaid expenses due to the coronavirus crisis.

If your business was doing well before the coronavirus outbreak, a loan might be a good idea if you need help, say, covering payroll, points out Bob Coleman, editor of the Coleman Report, a trade newsletter for small-business bankers.

The Treasury Department directly funds SBA disaster loans, unlike other SBA loan programs funded by SBA-approved lenders and guaranteed by the agency.

Compared with traditional loans from banks or credit unions, SBA disaster loans have some advantages:

-- Lower interest rates. The interest rate for these loans is 3.75% for small businesses and 2.75% for nonprofits. This could be lower than a bank or credit union loan, depending on credit scores and other factors.

-- Longer repayment terms. SBA loans have repayment terms of up to 30 years. Terms are based on your ability to repay.

-- Lower monthly payments. Extended repayment terms, along with a lower interest rate, can make monthly payments more manageable.

How Can Your Small Business Qualify for an SBA Economic Injury Disaster Loan?

SBA economic injury disaster loans are available to:

-- Small businesses

-- Most private nonprofits

-- Small agriculture co-ops

The SBA defines a small business as an independent business with fewer than 500 employees.

"We're not bailing out the Wall Street banks or GM," Coleman says. "We're bailing out Main Street, giving money directly to small-business owners."

Your business must have substantial economic injury and be located in a state with an economic injury declaration. For coronavirus disaster loans, states qualify for this declaration once at least five small businesses have suffered substantial financial losses.

When Should You Apply for an SBA Disaster Loan?

If you want a disaster loan, apply as soon as possible because funding is finite, and many businesses have been hurt by the COVID-19 pandemic.

This crisis is deeper than the Great Recession of 2008-09, says Rohit Arora, CEO and co-founder of small-business funding resource Biz2Credit. The effects of the virus hit so quickly, and no one was prepared, he adds.

"The ramifications are much wider and across the whole nation," Arora says.

If you hope to borrow, have backup options as well. The SBA economic disaster injury loan isn't your only choice.

"Business owners should pursue this option but should pursue all options because we simply don't know how long it will take to process (the loans), how quickly the allocated funds will be exhausted, and what the final underwriting will look like," says Gerri Detweiler, education director for business financing resource Nav.

Other types of SBA loans you could apply for are:

-- 7(a) loans. Small businesses can access loans of up to $5 million for uses such as equipment, furniture, real estate, inventory and working capital.

-- 504 loans. The SBA, along with nonprofits certified to work with the agency, can provide long-term fixed-rate loans of up to $5.5 million for assets such as equipment or real estate.

If your business hasn't been as hard hit by the coronavirus as others, now might be the time to apply for either a conventional loan or an SBA-backed loan from a bank or credit union, Detweiler says.

[Read: Best Unsecured Business Loans.]

What Options Do You Have Other Than an SBA Loan?

Small-business owners have several options for staying afloat other than taking out an SBA loan, but many are risky.

Some of those choices include:

-- Liability negotiation. Landlords, creditors, utility companies and suppliers may allow you to postpone payments.

-- Home equity loans. With mortgage rates near all-time lows, a business owner could take out a home equity loan or line of credit to cover costs. "But if the business does not pick up, you just put your house on the line," Detweiler says.

-- Business credit cards. You can access capital quickly with credit cards, which might free up cash flow to keep you going. Credit cards with 0% APR offers can give you time to pay off expenses interest-free.

-- Loans from friends and family members. This could work, as long as "they understand the risk they're taking," Detweiler says. You might not be able to pay back the loan right away or at all.

-- Borrow from a retirement fund. This could be very risky, as many people haven't saved enough for retirement. "I'd hate to see a situation where a business owner taps a retirement fund to stay afloat, business goes under, and you've lost both the business and retirement savings," Detweiler says.

-- Other loan options. Businesses would likely get approved and receive money more quickly from an online lender than they would from banks or credit unions, Detweiler says. Higher-interest alternative lenders are another possibility, as long as you can pay them back quickly.

How Can You Apply for an SBA Disaster Loan?

Review the SBA's webpage on coronavirus-related loans and prepare your application. You'll need to get your business financial statements in order, Coleman says.

Detweiler adds: "You have to demonstrate an economic impact, so you need to have something ready."

Applications are sent directly to the SBA. Applying online is fastest, but you can also send an application by U.S. mail.

If you have questions, contact the SBA disaster assistance customer service center at 800-659-2955 or disastercustomerservice@sba.gov. Here is what you will need to complete your application:

-- Contact information and Social Security numbers for all applicants

-- Employer Identification Number

-- Business financial statements, including earnings statements and balance sheets

-- Business and personal tax returns

-- Personal financial statements

-- Schedule of liabilities

-- Deed or lease information

-- Insurance information

[Read: Best Bad Credit Loans for Small Businesses.]

How Quickly Will SBA Disaster Loans Be Processed?

Processing time for SBA economic injury disaster loans may be two to three weeks, and loans could be disbursed within days of closing, says Carol R. Wilkerson, SBA press director.

By comparison, processing expedited SBA loans after Hurricane Sandy in 2012 took almost 45 days. For Hurricane Florence six years later, the average time was about seven days. But the SBA was better staffed, and demand for loans was lower than expected.

"I'm concerned at the size and scope of this -- how quickly they'll be able to ramp up to process the applications and disburse funds," Detweiler says.

In the coming weeks and months, the SBA will face a lot of pressure to expedite loans. Adds Arora: "My concern is that they need to act fast."

Coleman says he has discussed this need with a restaurant owner in his home state of California. The owner is worried about finding enough money to pay his employees while his restaurant is closed during the coronavirus crisis.

"These people want to do the right thing. But if they don't have enough money, they can't do it. That's going to reverberate through the economy," Coleman says. "That's why we need to take care of small businesses."



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