When Disaster Strikes: Creating a Survival Plan for Your Business

What would you do if a fire, flood, earthquake or power failure made it impossible for you to operate your business for several days, weeks or months? What would the damage do to your company’s operations and your personal income?

Fortunately, the Small Business Administration (SBA) understands the sudden hardship businesses face from unthinkable disasters and has a number of programs to help businesses recover from a crisis.

The importance of disaster declarations

Once the president, a state governor, the secretary of agriculture or the secretary of commerce declares a disaster, small-business owners can apply for disaster recovery loans that feature repayment terms as long as 30 years. It's important to note that SBA disaster loan programs are only available for a short window of time after the declaration of a disaster, so it’s important to act fast in an emergency.

The SBA's most popular loan program helps business owners repair or replace damaged buildings, fixtures, inventory and equipment that are not covered by other commercial insurance.

The SBA also offers what’s known as an economic injury disaster loan (EIDL), which can be an important source of working-capital relief. To qualify for an EIDL, business owners have to demonstrate the inability to pay existing loans, rent and other ordinary and necessary operating expenses.

For example, if a clothing store was wiped out due to conditions similar to Superstorm Sandy, the business owner could potentially apply for one loan to cover the cost of lost inventory and a second EIDL to cover the expenses associated with business downtime. Entrepreneurs who operate their businesses out of their homes may also qualify for disaster home loans.

Businesses can receive both types of loans for a total of up to $2 million. Most businesses pay a modest 4 percent interest; nonprofit organizations pay 3 percent.

Through the end of February, the SBA has approved 1,445 loans representing $152.7 million for business owners affected by Superstorm Sandy in New York, New Jersey, Connecticut, Rhode Island, Maryland, Virginia, North Carolina and Puerto Rico.

Insider’s tips for protecting your business

SBA spokeswoman Carol Chastang says that final loan amounts are based on the SBA’s assessment of economic injury, what’s required to get a business up and running again, and the creditworthiness of the business and its owner.

“The SBA tries to be as flexible as possible and provide as much as business owners can reasonably repay. However, we don’t want to add to a business owner’s problems by adding more debt to an unsuccessful business,” says Chastang.

Here are some other fine points of SBA disaster recovery loans and disaster preparedness:

- Uninsured coverage: SBA business disaster loans can help businesses that are not covered by other insurance coverage. The SBA may also look closely at who is responsible for physical property losses. Sometimes losses may be covered by landlord insurance.

- Document requirements: SBA disaster loans are different than the SBA’s popular 7(a) loan. Whereas 7(a) loans are approved by commercial banks, but backed up by the SBA’s loan default guarantee, disaster loans are approved directly by the SBA.

To apply for an SBA disaster loan, business owners must present three years of tax returns; information about the business ownership; information about ongoing fixed expenses; description and value of lost inventory, fixed assets or equipment; and information on business creditors.

“Business owners have to store key business documents, financial statements, tax returns, lists of assets and other relevant business information off-site. In a disaster, owners may not be able to retrieve their records from their own workplace or even from their local accountant’s or lawyer’s workplace,” warns Chastang.

- More gotchas: Business owners can be denied disaster relief coverage if the business owner has outstanding state or federal taxes, including student loans. Another reason for loan turndown is a lack of current business licenses or failure to keep a corporate entity “in good standing.” This means that corporate entities must be current on corporate annual reports, maintenance fee payments and other requirements associated with maintaining a corporate entity.

Here’s one last recommendation. Business owners should not rely on SBA disaster loan programs as a replacement for flood insurance, standard business liability insurance or business interruption insurance. SBA programs only kick in if there is an official declaration of a disaster. So if your community is without power for a week or two, but no disaster is declared, you will have to absorb the loss or turn to other insurance coverage.

For more information on disaster recovery loans and disaster preparedness, visit sba.gov. Business owners can also talk to an SBA representative at 1-800-659-2955. For information on federal flood insurance, visit fema.gov/national-flood-insurance-program.

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