9/24/05
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SBA Disaster
FAQ
If your business -- large or small -- has suffered physical damage as a
result of a disaster, you may be eligible for financial assistance from
the U.S. Small Business Administration.
Any business that is located in a declared disaster area and has
incurred damage during the disaster may apply for a loan to help repair
or replace damaged property to its pre-disaster condition. The SBA makes
physical disaster loans of up to $1.5 million to qualified businesses.
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Use Of Proceeds
Repair or replacement of real property, machinery, equipment, fixtures,
inventory and leasehold improvements may be included in the loan. In
addition, disaster loans to repair or replace real
property or leasehold improvements may be increased by as much as 20
percent to protect the damaged real property against possible future
disasters of the same type.
SBA loans will cover uninsured physical damage. If you are required to
apply insurance proceeds to an outstanding mortgage on the damaged
property, you can include the amount applied in your disaster loan.
Interest Rates
The interest rate that the SBA charges on a disaster loan is determined
by your ability to obtain credit elsewhere - that is, from nonfederal
sources.
If You Cannot Obtain Credit Elsewhere
If the SBA determines that the business (or nonprofit organization) is
unable to obtain credit elsewhere (considering the cash flow and assets
of the business, its principals and affiliates), the law sets a maximum
interest rate of 4 percent per year.
The maximum maturity for such business disaster loans is 30 years.
However, the actual maturity is based on your ability to repay the loan.
If You Can Obtain Credit Elsewhere
For businesses that the SBA has determined are able to obtain credit
elsewhere, the interest rate cannot exceed that being charged in the
private market at the time of the physical disaster or 8 percent,
whichever is less. The maturity of this loan cannot exceed three years.
Note: Charitable, religious, nonprofit and similar organizations with
the ability to obtain credit elsewhere are eligible for physical
disaster loans for up to 30 years at an interest rate based
upon a different statutory formula. The nearest SBA disaster office can
supply you with the interest rate.
Frequently Asked Questions About Physical Disaster Business Loans
Q. I've heard that SBA loan applications are complicated and hard to
complete. Is this true?
A. No. The application form asks you for the same information about the
business and its substantial owners and managers that generally is
required for a bank loan. If you need help, SBA
personnel will explain the forms and give you assistance at no charge.
You may use the services of accountants, attorneys or other
representatives if you wish, but be sure they are reliable and that
their fees are reasonable. You must report the use of a representative
and the fees charged on your loan application.
Q. If I receive a disaster loan, may I spend the money any way I want?
A. No. The disaster loan is intended to help you return your property to
its pre-disaster condition and, under certain circumstances, for
mitigating devices. Normally, SBA funds cannot be used to expand or
upgrade a business. If, however, city or county building codes require
such upgrading, then you can use the SBA loan for that purpose. Your
loan will be made for specific and designated purposes. Remember that
the penalty for misusing disaster funds is immediate repayment of
one-and-a-half
times the original amount of the loan. The SBA requires that you obtain
receipts and maintain good records of all loan expenditures as you
restore your damaged property, and that you keep these receipts and
records for three years.
Q. I already have a mortgage on my business. Can the SBA refinance my
mortgage?
A. In certain cases, yes. The SBA can refinance all or part of prior
mortgages, evidenced by a recorded lien, when the applicant :
1) does not have credit available elsewhere;
2) has suffered substantial,
uncompensated disaster damage (40 percent or more of the value of the
property); and
3) intends to repair the damage. An SBA loan officer can provide you
with more detailed information on your specific situation.
Q. Is collateral required for these loans?
A. Loans of $10,000 or less do not require collateral. Loans in excess
of $10,000 require the pledging of collateral to the extent it is
available. Normally the collateral would consist of a first or second
mortgage on the damaged business property. In addition, personal
guaranties by the principals of a business are required. The SBA will
not decline a loan for lack of collateral, but you must pledge available
collateral.
Q. When will I know if I get the loan?
A. That depends on when you file a complete SBA loan application. To
make a loan, we must estimate the cost of repairing the damage, be
satisfied that the business can repay the loan from its
operations and take reasonable safeguards to help ensure that the loan
is repaid. Since we process
applications in the order received, the faster you can return it with
all the needed information, the faster we can work on it. We try to make
a decision on each application within seven to 21 days. Be sure the
information in your application is complete; missing information is the
biggest cause of delay.
Q. How soon can I expect the money?
A. After we approve the loan, we will tell you what documents are needed
to close the loan. Once we receive these documents, we can disburse the
funds. Because our disaster loans are subsidized, the
SBA provides the money in installments, as you need it to repair or
replace the damage.
Q. Will the SBA check the losses I claim?
A. Yes. Once you have returned your loan application, an SBA loss
verifier will visit you to determine the extent of the damage and the
cost to repair or replace it.
Q. What information do I need to help me complete the loan
application form?
A. Necessary information is specified in the loan application and
includes: a) an itemized list of losses with your estimate of the repair
or replacement cost of each item; b) a copy of certain federal income
tax information (as specified on the application); c) a brief history of
the business; and d)
personal and business financial statements. A contractor's estimate for
repairing structural damage may be desirable, but you may make your own
cost estimate if you wish. Remember to sign
and date each part of the application; we cannot process it if you omit
any form that requires your signature.
Q. I had to remove debris from my property after the disaster. Can this
expense be included in my loan application?
A. Yes, but your own labor and that of family members cannot be
included. Amounts paid to others and any equipment rental can be listed
as part of repairs to real estate. Remember that the maximum loan limit
on physical damage is $1.5 million, and debris removal is included in
that limit.
Q. I am a farmer. Am I eligible to apply for SBA assistance for damage
to my farm?
A. No, not for damage to farms. However, you may apply to the SBA only
for a loan to cover the damage to your home and its contents. It may be
in your interest to seek assistance first from the U.S. Department of
Agriculture.
Q. I would like to get a contractor's estimate for the cost of repairing
damage to my business, but I'm having difficulty in finding a
contractor. Should I hold up my application until I get the estimate?
A. No. You might miss the deadline for filing your application by
waiting for a contractor's estimate. If you have a contractor's
estimate, include it; otherwise include your own. The SBA will verify
the damage estimate in your application. The sooner you file a complete
application, the faster the SBA can process it.
Q. Should I wait for my insurance settlement before I file my loan
application?
A. No. Don't miss the filing deadline by waiting for an insurance
settlement. The application should be returned to the SBA right away;
final insurance information can be added when a settlement is made. We
can approve a loan for the total replacement cost; however, you must
assign the insurance proceeds to the SBA settlement.
Q. Must I use my own money or try to borrow from a bank before I come to
the SBA?
A. No. The resources of the business and its principals will be
considered in determining the ability of the business to obtain credit
elsewhere.
Q. If my business is completely destroyed, can the SBA lend me money to
relocate my business?
A. Yes. In certain circumstances, limited relocation costs can be
included in the loan amount. Whenever relocation is involved, you should
contact the SBA disaster office before making any
commitments.
Q. Besides the damage to my property, my business suffered economically
from the disaster. Do SBA loans cover these economic losses?
A. Yes they do, but only if you and your business do not have credit
available elsewhere, and your business qualifies as small as defined by
the SBA. The same application is used together with
a supplementary form for the economic injury. The maximum amount the
business and any affiliates may borrow for any one disaster is limited
to $1.5 million for both physical damage and economic injury combined.
(See SBA Publication DA-3, Economic Injury Disaster Loans for Small
Business.)
Q. Is flood insurance needed to get a loan?
A. If the business is in a special flood hazard area, or if the disaster
damage was caused by flooding, it must have flood insurance before we
can disburse a loan. If the business was legally required to maintain
flood insurance but did not, then the SBA will not make a disaster loan.
Additional Reading:
Home and Personal
Property Disaster Loans
Disaster Tax Relief
Related Articles:
Disaster Biz Loans
Disaster Business Loans
Home and Personal Property Disaster
Loans
Disaster Planning
SBA Disaster
FAQ
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