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

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. The total cost to the state from the Hawaiian disaster has been estimated at $4 billion to $6 billion by Moody’s.

For business owners, it helps to know options to recover and rebuild exist, including federal loans, grants and state and local funding. 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.

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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. 

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 as a result of wildfires that began August 8 in Maui County. Interest rates on these loans can be as low as 4 percent for small businesses and 2.375 percent for private nonprofit organizations, with terms up to 30 years. Interest does not begin to accrue until 12 months from the date of the initial disaster loan disbursement. SBA disaster loan repayment begins 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 the continuation of health care benefits, rent, utilities, and fixed debt payments. There are restrictions though. For instance, EIDL is only available to small businesses that are unable to obtain credit elsewhere, as determined by the SBA, and collateral requirements may apply. Businesses can obtain up to $2 billion in funding, based on their actual economic injury and financial needs — which many business owners in Hawaii, in particular, are finding hard to document, based on the scope of the devastation, Groves said. 

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. Businesses of any size and most private non-profit organizations may apply. Loan proceeds can be used for the repair or replacement of real property, machinery, equipment, inventory and fixtures. Qualified businesses can receive up to $2 million to cover disaster losses not fully covered by insurance. A business may qualify for an EIDL and a physical disaster loan, but the maximum combined loan is $2 million, according to SBA.

FEMA grants

FEMA has several assistance programs that can help individuals impacted by disasters, with availability based on zip code and location qualification. FEMA works with SBA to determine if people should get money for personal property or transportation assistance from FEMA or SBA. FEMA does not provide money for losses to people who may qualify 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 paid back. 

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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. Eligible small businesses with one to 750 employees could qualify for up to $1 million in funding.

In hurricane-laden Florida, Governor Ron DeSantis recently activated the Florida Small Business Emergency Bridge Loan Program, making $20 million available for businesses impacted 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, programs related to financial assistance come directly to their inbox. 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. Small businesses should make sure to understand the nitty-gritty details of what they are being offered before signing up for any type of funding, she said. The same advice pertains to reputable providers; before agreeing to any loan or funding opportunity, owners should be sure to read the terms carefully and understand what they are signing up for. 

Proactively line up partners, review insurance coverage

It’s also advisable for owners to keep a list of trusted partners that can include nonprofits like a local Community Development Financial Institution, an SBA Small Business Development Center, or independent organizations that are known to support small businesses, Martinez said. In the event of a disaster, these resources will be on hand, allowing the owner to send a quick email or text and ask about possible aid options or the legitimacy of a particular vendor that may be soliciting you, she said. 

Before disaster strikes, small businesses should also check their insurance coverage to see what’s covered — and what’s not — for every imaginable type of disaster, Groves said. 

For example, some businesses in Hawaii were surprised to learn that their insurance coverage for fire didn’t cover them for the ash damage they faced. Even if a business is covered, it can still take months to collect the money, but at least owners will have a sense ahead of time of what will be covered, Groves said. Also, suppliers are more likely to be lenient about repayment terms for businesses that have insurance proceeds coming to them, he added.

On average, business owners tend to have no more than a month or two of cash on hand — Groves cited data showing 37 days of cash as average — but because of the frequency of natural disasters, having a longer runway, if possible, is better. “If you’re just operating your business that may be sufficient, but if you get blindsided by a natural disaster that could take months to recover from, it’s not enough,” Groves said.