The disaster-era loans critical to the survival of Main Street

An aerial photo shows burned cars and homes in a neighborhood destroyed by a wildfire on August 18, 2023 in Lahaina, Hawaii.

Justin Sullivan | Getty Images

The widespread damage from the recent wildfires in Hawaii and Hurricane Idalia in Florida underscores the costly impact of natural disasters on small businesses. The total cost to the state of the Hawaii disaster was estimated by Moody’s at $4 billion to $6 billion.

It’s helpful for business owners to know that there are options for recovery and rebuilding, including federal loans, grants, and state and local financing. This is particularly important given the spate of natural disasters plaguing the United States. “You never know when a disaster is going to hit you, and they seem to be more frequent and longer these days because of climate issues,” said Eric Groves, co-founder and chief executive of Alignable, an online network of business owners.

Here’s what small businesses need to know about post-disaster financing options:

SBA low interest disaster loans

Small businesses that have suffered “significant economic injury” – meaning they are unable to meet their obligations and pay normal expenses – may be eligible for an SBA Economic Injury Disaster Loan, also known as an EIDL.

In Hawaii, for example, the SBA recently said low-interest EIDLs are available to small businesses and most private nonprofit organizations in Hawaii, Honolulu, Maui, Kalawao and Kauai counties following wildfires that broke out in Maui County on August 8. Interest rates on these loans can be as low as 4 percent for small businesses and 2.375 percent for private nonprofits, with terms of up to 30 years. Interest does not begin to accrue until 12 months after the date of the first disbursement of the disaster loan. Repayment of the SBA disaster loan will begin 12 months from the date of the first disbursement, the SBA announced in August.

EIDL proceeds can be used for working capital and normal expenses such as continuing health benefits, rent, utilities and fixed debt repayments. However, there are limitations. For example, EIDL is only available to small businesses that cannot obtain a loan elsewhere, as determined by the SBA, and collateral requirements may apply. Businesses can receive up to $2 billion in funding based on their actual economic damage and financial need — which is particularly difficult to document for many business owners in Hawaii because of the scale of the devastation, Groves said.

To file a claim, the business does not need to have suffered any property damage.

There is a separate one SBA Disaster Relief Program for businesses in a designated disaster area to cover property damage to the business. Companies of all sizes and most private non-profit organizations can apply. Loan proceeds can be used to repair or replace real estate, machinery, equipment, inventory, and furnishings. Qualifying businesses can receive up to $2 million to cover catastrophic losses that are not fully covered by insurance. A business can qualify for an EIDL and a physical disaster loan, but the maximum combined loan is $2 million, according to the SBA.

FEMA grants

FEMA has several assistance programs This can help those affected by disasters, with availability based on zip code and location qualifications. FEMA works with the SBA to determine whether people should receive money for personal property or transportation assistance from FEMA or SBA. FEMA does not provide money for losses to people who may be eligible for an SBA loan.

FEMA automatically refers people who meet the SBA’s income standards to the agency for a disaster loan. In most cases, FEMA grants do not have to be repaid.

Public financing options beyond the federal government

States, counties and municipalities may also have financial resources available to owners, said Oren Shani, certified business coach at Accion Opportunity Fund, which provides small business owners with access to capital, networking and coaching.

For example, California, which is prone to earthquakes and wildfires, has this California Small Business Finance Center Disaster Relief Loan Guarantee. Eligible small businesses with one to 750 employees could qualify for up to $1 million in funding.

In hurricane-ravaged Florida, Gov. Ron DeSantis recently activated the Florida Small Business Emergency Bridge Loan Programproviding $20 million to businesses affected by Hurricane Idalia.

Florida CFO Jimmy Patronis on Hurricane Idalia and the state's insurance crisis

Shani recommends businesses sign up for newsletters from their local or state chamber of commerce or equivalent organizations. This way, financial aid-related programs land directly in their inbox. However, programs can come and go, so entrepreneurs shouldn’t rely on outdated information, even if it’s just a few months ago, Shani said.

Beware of predatory lenders

Predatory lenders tend to advertise their distress when small businesses are most in need, said Carolina Martinez, executive director of CAMEO, a California small business network. Small businesses should make sure they understand the details of their offer before signing up for any type of financing, she said. The same advice also applies to reputable providers; Before agreeing to a loan or financing option, owners should read the terms carefully and understand what they are signing up for.

Proactively identify partners and check insurance coverage

It is also advisable for owners to maintain a list of trusted partners, which may include nonprofit organizations such as a local Community Development Financial Institution, an SBA Small Business Development Center or independent organizations known for supporting small businesses, Martinez said . In the event of a disaster, these resources are available so the owner can quickly email or text and ask about possible assistance options or the legitimacy of a particular provider you may be requesting, she said.

Before a disaster strikes, small businesses should also review their insurance coverage to see what is covered — and what is not — for every conceivable type of disaster, Groves said.

For example, some businesses in Hawaii were surprised to learn that their fire insurance did not cover them for the ash damage they were exposed to. Even if a business is insured, it can still take months to collect the money, but at least owners have an idea in advance of what will be covered, Groves said. Suppliers are also more likely to be more lenient on repayment terms for companies that have insurance proceeds, he added.

On average, business owners don’t have more than a month or two of cash on hand — Groves cited data showing an average of 37 days of cash — but because of the frequency of natural disasters, it’s better to have a longer runway if possible. “If you’re just running your business, that might be enough, but if you’re caught in a natural disaster that could take months to recover, that’s not enough,” Groves said.

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