The disaster era business loans that are becoming key to Main Street's survival

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In an aerial view, burned cars and homes are seen in a neighborhood that was destroyed by a wildfire on August 18, 2023 in Lahaina, Hawaii.

Justin Sullivan | Getty Images

Widespread damage from Hawaii’s recent wildfires and Hurricane Idalia in Florida underscores the costly effects of natural disasters on small businesses. Moody’s estimated the total cost of the Hawaiian disaster at between $4 and $6 billion. For business owners, knowing that there are options for recovery and rebuilding is important. These include federal loans, state and local funding, and grants. This is especially important given the spate of natural disasters impacting the U.S. “You never know when a disaster is going to hit you, and they seem to be more frequent and longer these days due to 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 funding options after a disaster:

SBA low-interest disaster loans

Small businesses that have suffered a “substantial economic injury” — meaning they can’t meet their obligations and pay normal expenses — may be eligible for an SBA Economic Injury Disaster Loan, also known as EIDL. SBA low-interest disaster loans

Small businesses that have suffered a “substantial economic injury” — meaning they can’t meet their obligations and pay normal expenses — may be eligible for an SBA Economic Injury Disaster Loan, also known as EIDL. These loans have interest rates as low as 4% for small businesses, and as low as 2.375 percent in the case of private nonprofits. Terms can range from 30 years to up to 4 percent. The interest does not start to accrue for 12 months after the initial loan disbursement. The SBA announced that the SBA disaster loan payment begins 12 months after the initial disbursement. However, there are some restrictions. EIDL, for example, is only available to those small businesses who are unable, according to the SBA to get credit anywhere else. Collateral requirements may also apply. Groves says that businesses can receive up to $2 billion based on actual financial need and economic injury. However, many Hawaii-based business owners are having difficulty documenting their needs due to the extent of the destruction.

The business doesn’t need to have suffered property damage to apply.

There’s a separate SBA disaster assistance program for businesses in a declared disaster area to cover property damage to the business. Small businesses of all sizes and non-profit private organizations can apply. The loan proceeds can be used to repair or replace real estate, machinery, equipment and inventory. Qualified business can receive up $2 million for disaster losses that are not covered by insurance. FEMA grants

FEMA offers several assistance programs to help those affected by disasters. These programs are available based on zip codes and location qualifications. FEMA and SBA work together to determine whether people are eligible for FEMA assistance or SBA funding in the form of personal property or transportation. FEMA does NOT provide financial assistance to those who qualify for SBA loans.

FEMA refers automatically people who meet SBA income standards for disaster loans. FEMA grants are usually not repaid.

Public finance options beyond the federal government

States, counties and municipalities might also have financial resources for owners to tap, said Oren Shani, a certified business coach at Accion Opportunity Fund, which provides small business owners with access to capital, networks and coaching.

For example, earthquake and wildfire-prone California has the California Small Business Finance Center’s Disaster Relief Loan Guarantee. Small businesses that are eligible and have between one and 750 employees may qualify for funding of up to $1,000,000. The newsletters will inform them of financial aid programs. Programs can come and go, however, so business owners shouldn’t rely on dated information, even if it’s only from a few months earlier, Shani said.

Beware of predatory lenders

Predatory lenders tend to come out of the woodwork when small businesses are most needy, said Carolina Martinez, chief executive of CAMEO, a California micro-business network. She said that small businesses should be sure to read the fine print before signing up for funding. Before signing on to any funding or loan, owners must read and understand the terms. Proactively review insurance coverage and line up partners

It is also important for business owners to maintain a list that includes trusted partners. These can be nonprofits such as a Community Development Financial Institution in your area, the SBA Small Business Development Center or independent organizations known to help small businesses. These resources are available in the event of disasters, and will allow the business owner to quickly send an email or text asking about the options for aid or the legitimacy of any vendor who may be contacting you. Groves says that small businesses need to check their insurance policies before disaster strikes. They should see what is covered and what is not for all types of disasters. For example, businesses in Hawaii learned that their fire insurance didn’t cover the ash damages they suffered. Groves says that even if the business is insured, it may take several months before they receive their money. However, at least the owners will know what to expect. Groves said that on average, businesses have 37 days’ worth of cash. However, because natural disasters are so frequent, it is best to have a longer runway. Groves says that if you are just running your business, that might be enough, but when you’re blindsided by an unexpected natural disaster, that’s not good enough.