Pros and Cons of SBA Disaster Loans

Once your business faces a disaster, the first thing that comes to your mind is how you are going to pay for the recovery. Insurance will help for some expenses, but you might need additional financing. To fully afford to rebuild your business, you will need additional capital.

If this is your case, a disaster loan from the Small Business Administration (SBA) may be a viable funding option. However, you should weigh the pros and cons of SBA disaster loans before you apply.

In this post, we will review those pros and cons of SBA disaster assistance so you can make a decision about how to afford your business’s disaster recovery.

What is an SBA Disaster Loan?

You could qualify for a SBA Disaster Loan if your business is damaged or destroyed due to a hurricane, fire, drought, or flooding. You will need to prove that your business is in a declared disaster area to qualify. The SBA will want to know how your business was affected by the natural disaster.

In some cases, small business owners can seek FEMA small business loans as well. Typically, you’ll only qualify for this program if you don’t qualify for other SBA loans.

Many business owners have sought disaster assistance due to the challenges caused by the COVID-19 pandemic. If you own a small business or non-profit based in the U.S. with 500 or fewer employees, you may qualify for the COVID-19 Economic Injury Disaster Loan (EIDL).

Pros of SBA Disaster Loans

  • Affordable: compared to other financing options, SBA Disaster Loans is an affordable option for loan applicants. If you meet the eligibility requirements, the interest rate won’t exceed four percent.
  • High loan amounts: disasters can be expensive. In addition to the cost of replacing destroyed property or equipment, you will need to make up for down time caused by the disaster. Without enough financing, you’ll be forced to allow any debts to accumulate interest.
  • Flexible use of funds: The SBA’s disaster loans can help you pay for almost anything needed after a disaster. For example, the business physical disaster loan can be used for real estate, personal property, machinery, equipment, fixtures, and repairs. Also, with an Economic Injury Disaster Loan, you can use the funds to meet your obligations and pay for operating expenses that could’ve been met if the disaster hadn’t occurred.

Cons of SBA Disaster Loans

  • Eligibility depends on your alternatives: you will not be eligible for SBA Disaster loans if you can get financing elsewhere. For the disaster loans you’re eligible for, you’ll likely be charged a higher interest rate of up to eight percent. You should also keep in mind that the SBA will determine whether you can obtain financing elsewhere.
  • Eligibility depends on location: The SBA provides disaster loan programs to businesses that have been affected by a disaster.
  • Hard to qualify for: unlike typical small business loans, SBA disaster loans are hard to qualify for. If you have alternatives or you aren’t located in a disaster area, you might not be eligible.

The Bottom Line

Take the time to thoroughly review the SBA disaster loan program and see if it’s the right funding option for you. It’s important to remember the application process is uncertain and complicated. After you weigh the pros and cons, evaluate other financing options so you can select the best solution for your business.