Enduring a major natural disaster can be a stressful and traumatic experience on its own. But when the disaster also severely damages or destroys your home or business, the loss can feel overwhelming, both emotionally and financially.
If you've experienced such a loss, you may find help from an unlikely source: the Small Business Administration. The SBA has a disaster loan program for both consumers and businesses suffering financial hardships from a hurricane, flood or other disaster. Knowing a few tricks about how the loans work can help you decide whether they're right for you in your time of need.
The low-interest loans are intended to help disaster victims rebuild and get back on their feet. James Rivera, Associate Administrator for SBA's Office of Disaster Assistance, says the disaster program loans about $1 billion a year to those affected by a wide range of emergencies.
But don't be fooled by the SBA name. One of the biggest misconceptions about the program is that these loans are only for small-business owners. In fact, a wide range of people and businesses can apply, including homeowners, renters, businesses of all sizes, and private nonprofit organizations.
Rivera says the program isn't meant to compete with routine forms of lending, and is designed specifically with disaster victims in mind. Traditional bank loans are often collateral-based, meaning loan approval and amounts are based in large part on the value of property used to secure the loan.
However, a major disaster may severely damage or even destroy any would-be collateral. The SBA won't decline a loan because of lack of collateral, though it does require you to pledge what you have available.
The loan process starts almost immediately following a disaster. Once the Federal Emergency Management Agency arrives on the scene, it will refer those affected by the disaster to various available resources, including the loan program.
Rivera says the biggest mistake people make when applying is simply not paying attention to the deadline. The application filing period is 60 days for physical damage, and nine months for what the SBA refers to as "economic injury," which is more crippling and applies only to certain organizations.
Even if you aren't sure you will need a loan, Rivera recommends applying anyway so you don't miss the deadline. If the loan is approved, you'll have 60 days to think about it and, if you decide to go ahead with the loan, to sign and return the documents. "Don't wait on your insurance," Rivera warns, "or you may be at risk of missing the deadline."
50 percent approval rate
On average, the SBA approves about half of the applications it receives. The main reasons applications are denied are lack of repayment ability and poor or inadequate credit -- as judged pre-disaster. "We understand that once a disaster hits, things may happen financially, so we look at their situation prior to that point," says Rivera. If a loan request is denied, the applicant is then referred to resources where grants and other forms of assistance may be available.
Craig R. Everett, assistant finance professor at the Graziadio School of Business and Management at Pepperdine University, says the best candidates for this type of loan are those who were comfortable financially before the disaster. He also notes that while the terms are very good, it is a debt that will need to be repaid. "Even though it is an inexpensive loan, it is still a loan."
It helps to keep some questions in mind when deciding whether to apply. Everett suggests applicants consider their financial situation and whether there is room for additional debt in the budget. For individuals, that means thinking about whether they were keeping up with loans and other debt they already had. For business owners, Everett says, "They should ask themselves, 'Was my business profitable enough before the disaster to be able to comfortably handle the payments for this extra loan?' If the answer is no, then the owner should think twice about taking on this additional debt load."
Streamlined application process
For those reeling from a disaster, the thought of navigating through government red tape might be enough to scare them away from applying. Rivera says they likely will find the process less cumbersome than they may fear, because the SBA has made a big effort to streamline it. For instance, applicants don't need to supply some of the documentation banks normally request when someone seeks a loan. "With our internal processes and resources, we can get a lot of the information ourselves, such as IRS records to verify tax return information," says Rivera.
Jamie Graber of Merrick, New York applied for a disaster loan in 2012 after her family's home sustained major damage when Hurricane Sandy hit Long Island. "When I went to the FEMA help center, they advised me to apply for an SBA loan. The loan was meant to cover any gap between what it would cost to repair the hurricane damage and what FEMA would ultimately settle with us based on our flood insurance coverage."
Graber recalls the online application being "very straightforward and easy to complete." However, once the loan was approved, she had second thoughts. She liked the low interest rate -- under 2 percent--but was apprehensive about having a lien placed on her home. She also felt the monthly payment was more than she could afford. In the end, Graber decided to decline the loan and just waited for her flood insurance to pay her claim.
Rivera notes that demand for disaster loans tends to fluctuate with the weather. During hurricane season, for example, funds are sure to be in greater demand. "During peak times, we can get several thousand calls a day," he says.
Tips for applying
Ideally, you will never have a need for a disaster loan. But should you ever find yourself in that position, here's what you need to know.
Eligibility: You (or your business) must be located in a region that has been declared a disaster. This disaster declaration can be made on the federal level by the U.S. president or by an authorized regional agency.
Low-interest loans, with long terms (up to a maximum of 30 years).
Loans have a standard deferment period -- payments aren't scheduled to begin for five months, to help give borrowers time to prepare for the expense.
For physical damage loans of more than $25,000 in presidential declaration areas, and physical damage loans of more than $14,000 in agency declarations, borrowers are required to pledge available collateral (meaning a lien will be placed on the property). For economic injury disaster loans over $25,000, borrowers are required to pledge available collateral.
Four steps to apply
There is a four-step application process:
Step 1: Before a homeowner or renter can even apply, they need to get a FEMA ID number. You can get that by calling 800-621-3362.
Step 2: Fill out the application forms. You can download them from the SBA website, or get them by calling 800-659-2955 or emailing disastercustomerservice.sba.gov. You will need to sign a form to have the IRS release your tax information.
Step 3: Your property will be inspected, the loss verified and a loan processed.
Step 4: If approved, the loan funds will be disbursed.