Numerous financing options exist for businesses that have suffered loss of revenue caused by a disaster.
The recent tornado that ravaged central Illinois displaced thousands of residents and caused millions of dollars of damage to homes and businesses. While the physical damage is devastating enough, the “hidden damage” to businesses in the aftermath of a disaster often receives little attention. Although insurance proceeds are helpful in rebuilding the physical damage caused to business assets, the long-term economic injury suffered due to the loss of business can be even more serious. Some business owners were fortunate to have purchased “business interruption insurance,” but most were not.
The best solution for businesses that have suffered a loss of revenue caused by the disaster is to work with their local banker to find a financing solution that works best for their situation. Many area banks have demonstrated their commitment to the community by creating innovative loan products for their customers, including lower interest rates and longer payback terms.
The SBA’s Disaster Loan Program
An often-overlooked solution to disaster-caused revenue losses is the U.S. Small Business Administration (SBA) Economic Injury Disaster Loan program. This low-interest loan is available to any business or nonprofit organization experiencing a loss of revenue as a result of a federally-declared disaster. Unlike many loan programs, this one provides working capital to enable businesses to continue paying normal operating expenses like wages, rent and utilities. Furthermore, this assistance is available regardless of whether the business suffered any physical property damage.
To qualify, the business must be located in one of the counties directly included in the disaster declaration, or in adjacent counties. For central Illinois, the counties included in the disaster declaration are Tazewell, Woodford and Champaign; the adjacent counties eligible for this loan program include Peoria, Bureau, Fulton, Livingston, Logan, Marshall, Mason and McLean. So, for instance, a Peoria company experiencing a loss of revenue as a result of the tornado can receive funding to keep them in operation. The details of the SBA Economic Injury Disaster Loan are as follows:
- Interest rates: businesses—four percent; nonprofit organizations—2.625 percent
- Repayment term: maximum of 30 years, based on the borrower’s ability to repay
- Loan amount: maximum of $2 million
- Collateral required: SBA will take a lien on any real estate, when available. Loans will not be declined due to a lack of collateral.
- Credit history: Applicant must have a credit history acceptable to the SBA.
- Refinancing: Existing loans on business real estate, machinery and equipment may be refinanced. For example, a qualifying business with an existing loan at nine-percent interest and a five-year loan term, could refinance the loan at four percent over a longer term, thereby reducing monthly payments significantly.
- Restrictions: Only uninsured or otherwise uncompensated disaster losses are eligible. Proof of economic injury required: Be prepared to provide either income statements or bank statements before and after the tornado that reflect a reduction in revenue or increase in expenses that results in the inability of the business to meet its obligations as they mature, or to pay ordinary and necessary operating expenses. Economic injury may include reduced working capital, increased expenses, cash shortages, accelerated debt, etc.
- Deadline to apply: August 24, 2014.
To apply for this loan, business owners must register online at www.DisasterAssistance.gov and complete the online electronic loan application at disasterloan.sba.gov/ela. For any loan questions, call the SBA Customer Service Center at (800) 659-2955 or send an email to [email protected].
An Alternative Route
Another option for businesses affected by the tornado is a disaster loan program administered by Accion Chicago, a nonprofit micro-lender. The Turner Center for Entrepreneurship at Bradley University is a remote lending partner of Accion. All loan decisions are made by Accion, but the loan closing takes place at Bradley, so travel to Chicago is not required. Details of the loan program are:
- Loan amount: Maximum of $50,000
- Interest rate: 3.25 percent
- Repayment term: Maximum of six years
- Use of loan proceeds: Any valid business purpose, except refinancing of existing debt
- Apply online at accionchicago.org or call (312) 275-3000.
After a disruption in business caused by a disaster, business owners should reassess their situation. Customer segments previously relied upon may have expanded or shrunk in size. Old competitors may have closed their doors, or new ones may have entered the market, sensing an opportunity. Revenues may have declined, or expenses may have increased. The product or service preferences of customers may have shifted. New opportunities may exist that require a change in business model. A wise business owner will recognize the need for strategic planning to realign their business with changing circumstances, but they need not do it alone. Talk with trusted advisers, business colleagues and customers. Advice on recovering from a disaster, or general business management advice can also be obtained free of charge from the Turner Center by calling (309) 677-2992. iBi
Ken Klotz is director of the Turner Center for Entrepreneurship at Bradley University.