How SBA disaster loans work

A Small Business Administration (SBA) disaster loan is a low-interest term loan for businesses and homes that have been affected by a natural disaster, like a hurricane, tornado, drought or flood. The SBA also created a special disaster loan program for businesses affected by COVID-19, called the COVID Economic Injury Disaster Loan (EIDL).

It’s the only loan program that the Small Business Administration directly funds, so you apply through the agency rather than a local bank. But you might not qualify for a FEMA grant or other relief programs if you take out an SBA disaster loan first.

Types of SBA disaster loans

• COVID Economic Injury Disaster Loan (COVID EIDL)
• Economic Injury Disaster Loan (EIDL)
• Business Physical Disaster Loan (BPDL)
• Home and Personal Property Disaster Loan (HPPDL)
• Mitigation Assistance Loan
• Military Reservist Economic Injury Disaster Loan (MREIDL)

COVID Economic Injury Disaster Loans

The SBA is still offering EIDLs to small businesses struggling during COVID-19. Here's a snapshot of how this program works:

• Loan amounts: Up to $2 million
• Rates: 3.75% for small businesses, 2.75% for nonprofits
• Fees: $100 filing fee for for collateralized loans, plus filing fees related to a real estate lien when applicable.
• Terms: Up to 30 years, with 24 months of deferment
• Collateral: Lien on business assets on loans over $25,000
• Personal guarantee: Required on loans over $200,000

The SBA is offering Economic Injury Disaster Loans (EIDLs) to small businesses and nonprofits in areas affected by COVID-19 until December 31, 2021. You can use the funds for working capital and to make payments on non-federal business debt — including debt you take on after you receive your EIDL.

Some small businesses may also qualify for a Targeted Advance of up to $15,000 and a Supplement Target Advance of up to $5,000. These are grants that come from the funds of your proceeds and will become available before you receive the rest of your funds. But not all small businesses can qualify.

COVID EIDL requirements

Businesses and owners must meet these criteria to qualify for a COVID EIDL:

• Meets size standards for your type of business and industry
• Eligible entity and owners
• Personal credit score of 570 for on loans of $500,000 or less
• Personal credit score of 625 for loans over $500,000
• Established as of January 31, 2020
• Valid tax identification number (ITIN) and Social Security numbers (SSN) for each owner with at 20% stake in the company or higher

COVID EIDL size requirements

The following types of businesses qualify for a COVID EIDL as long as they have no more than 500 employees, including affiliates, or meet SBA size standards for their industry:

• For-profit businesses
• Registered 501(c), (d), or (e) nonprofits— including faith-based organizations
• Nonprofits businesses that can prove they don't produce revenue
• Agricultural enterprises
• Cooperatives
• Tribal small business concerns
• Independent contractors and sole proprietorships

Businesses in the following industries can qualify for an EIDL even if they don't meet the size requirements — as long as they have fewer than 20 locations and no more than 500 employees per location:

Ineligible entities

Your business can't qualify for a COVID EIDL if it falls into one of the following categories — even if it meets all of the other criteria:

Business and personal bankruptcy can disqualify your business as well. The only exception are businesses operating under an approved reorganization plan under Chapter 5, 11, 12 or 13 bankruptcy — these can qualify for an EIDL.

Ineligible owners

Businesses owned by a member of congress are ineligible Businesses with the following types of owners are also ineligible for a COVID EIDL:

• Member of congress
• Majority owner more than 60 days late on child support payments
• Majority owner suspended from receiving loans or grants, or disbarred from contracting with the federal government

Any company with an owner that has more than a 20% stake in the company that meets one of the following criteria are also ineligible:

• Currently incarcerated
• Subject to an indictment, criminal information, arraignment or otherwise charged for a felony
• Convicted, pleaded guilty or nolo contendre, or began parole or probation for a felony related to fraud, bribery, embezzlement or a false statement on a loan or federal financial assistance application
• Convicted of a felony committed during a riot, civil disorder or declared disaster

Targeted or Supplemental Targeted Advances are available to the smaller business

To qualify for a Targeted Advance of up to $10,000 your business must meet these requirements:

• No more than 300 employees
• Saw a 30% loss of revenue due to COVID
• Located in a low-income area

Businesses that meet the following requirements may receive an extra $5,000 advance, through the Supplemental Target Advance program:

• No more than 10 employees
• Saw a 50% loss of revenue due to COVID
• Located in a low-income community

How to apply for a COVID EIDL

Follow these steps to apply for an SBA disaster loan:

1. Check your eligibility. Make sure your business meets the SBA size requirements if it has over 500 employees.
2. Apply online. SBA disaster loan applications are available directly through the SBA website — and are a lot simpler than your typical SBA application.
3. Save your confirmation number. You might not receive a confirmation email with your application number. Write it down or screenshot the confirmation screen after you submit the application for your records.
4. Get in touch. Call 800-659-2955, TTY 800-877-8339 or email disastercustomerservice@sba.gov to talk to an SBA official if you have any questions about the process.

Eligibility and loan amounts mainly are based on the financial impact of the outbreak on your business

It can take weeks to receive your funds

“Once a borrower applies, the approval timeline depends on volume,” Michael Myhre, the CEO of the Florida Small Business Development Center (SBDC) Network tells Finder. “The typical timeline for approval is two to three weeks, and disbursement can take up to five days. There is currently a high demand, so the agency has expanded its capacity to process applications.”

As for grants, those are much faster. “Funds will be made available within days of a successful application, and this loan advance does not have to be repaid even if the grantee is subsequently denied an EIDL,” Myhre says.

SBA Economic Injury Disaster Loans

Non-COVID EIDLs are essentially working capital loans for small for-profit and nonprofit businesses that have suffered a loss in revenue due to a natural disaster.

• Loan amounts: Up to $2 million
• Interest rates: Up to 4%
• Terms: Up to 30 years, depending on your ability to repay
• Collateral: Required on loans over $25,000 — preferably real estate

Non-COVID EIDLs are meant to help small businesses stay up and running while the disaster area recovers. Like other SBA loans, EIDLs are only available to small businesses that can't qualify for a loan elsewhere. Requirements may vary depending on the circumstances of the disaster.

SBA Business Physical Disaster Loan

SBA Business Physical Disaster Loan (BPDLs) are secured, long-term loans to pay for losses that your insurance won't cover.

• Loan amounts: Up to $2 million
• Interest rates: Up to 4% if the SBA thinks your business can’t qualify for credit elsewhere; up to 8% if it thinks it can
• Terms: Up to 30 years
• Collateral: Required for loans over $25,000

Business owners can use this to replace anything damaged or lost during a natural disaster— including equipment or machinery, inventory and real estate. You can also use the funds to repair property damage or improvements that your business made to rental property while on a lease.

You can apply for both an EIDL and a BPDL at the same time — if your business qualifies for both. But the maximum you can receive through both programs is $2 million.

SBA Home and Personal Property Disaster Loans

Home and Personal Property Disaster Loans (HPPDL) are another type of SBA physical damage loan. These loans are for people who own or rent a home that was damaged during a natural disaster.

• Loan amounts: Up to $200,000 for home owners and $40,000 for renters
• Interest rates: Up to 4% if the SBA believes you can’t get credit elsewhere; up to 8% if it thinks you can
• Terms: Up to 30 years
• Collateral: Required on loans over $25,000

Homeowners can use the funds to repair or replace their primary residence. Both renters and homeowners can use the funds to replace personal property that was destroyed in the disaster, such as cars, furniture and appliances.

You can only use a home and personal property loans for your primary residence — the SBA won't fund repairs to a vacation home.

SBA Mitigation Assistance Loans

Mitigation Assistance Loans offers funding for property improvements to protect your home or business agains future disasters. If you already received an SBA physical damage loan, you may be eligible to receive an additional 20% in funding to protect your property from floods, wildfires, wind damage and earthquakes.

SBA Military Reservist Economic Injury Disaster Loans

Military reservist economic injury disaster loans (MREIDLs) are long-term loans for businesses that suffer an economic loss because one or more employees has been called up for active duty. Here's a snapshot of how they work:

• Loan amounts: Up to $2 million
• Interest rates: 4%
• Terms: Up to 30 years
• Collateral: Required on loans over $50,000

This loan is meant to cover losses due to losing an employee — not expanding a business or refinancing long-term debt. How much you can borrow is based on the amount of economic injury the SBA believes your business will suffer from the loss.

Large businesses that are major employers might be able to qualify for more. But unlike some other disaster loans, you can't receive an MREIDL if your business has enough funds to operate — including funds from interruption insurance.

What can I use an SBA disaster loan for?

Depending on which type of SBA disaster loan you apply for, you might be able to use it for the following purposes:

• Repairing damaged real estate and leasehold improvements
• Property upgrades that decrease the future risk of damage
• Repairing machinery
• Working capital
• Replacing damaged inventory
• Replacing or repairing damaged vehicles
• Refinancing a personal mortgage

Do I qualify for an SBA disaster loan?

For most of these SBA loans, you or your business must be located in a declared disaster area to be eligible, with the exception of an MREIDL. Other requirements depend on the program you apply for.

• BPDL: Your business must be located in a declared disaster area and be physically damaged during the disaster.
• EIDL: Your business must meet the SBA’s definition of a small business and show it hasn’t been able to qualify for credit with another lender.
• MREIDL: You must meet the SBA’s credit standards — typically a credit score of 640 or higher — and have hazard insurance for loans over $50,000 and flood insurance if the business is located in a flood-prone zone. You also must prove your business won’t survive without SBA assistance.
• Home and personal property loan: The home or property must be your primary residence located in a declared disaster area.

How to apply for an non-COVID disaster loan

The application for disaster loans unrelated to COVID-19 is similar to the application for a COVID EIDL. Wait for the president officially declares the place where where you live or do business as a designated disaster area. Then, follow these steps:

1. Register with the Federal Emergency Management Agency (FEMA) online by by visiting disasterassistance.gov or by calling 800-462-7585 to make sure you aren't eligible for a grant.
2. Visit the SBA’s disaster loan assistance page if a FEMA grant doesn't cover all of your expenses. Create an account and complete the application by filling out an online form.
3. Fill out and sign IRS Form 4506-C and submit it along with your disaster loan application. This allows the SBA to request tax returns from the IRS.
4. Submit your application and check on your status by logging into your account.

In some cases, the SBA might send a site inspector might your property to determine how much you can borrow. Once you’ve finished the site inspection, an SBA loan officer will reach out to you to help you complete your application. This step can take between two and four weeks.

After you've closed your application, it can take up to five days to get your initial funds after you sign your closing documents. The SBA typically disburses $25,000 first, then the remaining funds after.

Disaster loans vs. disaster grants

SBA loans might be available as soon as disaster hits, but research all of your options before you submit your application. You might not be able to get approved for a government disaster grant if you already have a disaster loan.

In fact, one of the top complaints from disaster victims is that they weren’t aware that government grants would be available when they applied for an SBA loan — and they weren’t aware that already having an SBA loan made them ineligible for a grant. Even just applying for an SBA loan and then later rejecting it can make you ineligible for all of the grant money you would have been entitled to.

It’s not always clear what funding is available right away, so consider waiting to learn what your options are first.

Bottom line

When disaster strikes, an SBA disaster loan can help you and your business get back on its feet. The application is not nearly as complicated as a typical SBA loan — and in most cases, the SBA caps interest rates at 4% if you can’t get credit elsewhere. But you might want to wait to apply to make sure you don’t accidentally disqualify yourself from a disaster relief grant.

Check out our guide to business loans to find out how different types of loans work and start comparing lenders.

Fast alternatives to SBA disaster loans

You can only apply for an SBA disaster loan on the Small Business Administration’s website. But it can take a few weeks to get funding. If you need money ASAP, a non-government business loan from one of these lenders can help you bridge the gap in the meantime.

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