There are two distinct lending arms or agencies of the U. S. Small Business Administration (SBA); the disaster arm and the traditional or regular arm. If a disaster occurs, a geographic region will be declared a disaster at the presidential level, for a specified period of time. An SBA regional disaster team will set up offices within the affirmed disaster zone and directly offer low-interest, long-term loans for physical and economic damage caused by a disaster. The disaster loans will solely be available within the affected region and only during the specified time period.
The four major types of SBA disaster loans are:
1) Home and Personal Property Loans – covers damage to your home or private property. You may be eligible for financial assistance from the SBA – even if you do not own a business. As a homeowner, renter and/or personal property owner, you may apply to the SBA for a loan to help you recover from a disaster.
2) Business Physical Disaster Loans – if you have experienced damage to your business, you may be eligible for financial assistance from the SBA. These loans cover losses not fully covered by your insurance. Businesses of any size and most private nonprofit organizations may apply to the SBA for a loan to recover after a disaster. SBA makes physical disaster loans of up to $2 million to qualified businesses or most private nonprofit organizations. The loan proceeds may be used for the repair or replacement of real property, machinery, equipment, fixtures, inventory, and leasehold improvements.
3) Economic Injury Disaster Loans – applies if you have suffered substantial economic injury and are a small business, a small agricultural cooperative, or a private nonprofit organization. These loans are only available when SBA determines the applicant is unable to obtain credit elsewhere.
4) The Military Reservist Economic Injury Disaster Loan – provides funds to help an eligible small business meet its ordinary and necessary operating expenses that it could have met, but is unable to, because an essential employee was called-up to active duty in his or her role as a military reservist.
Traditional SBA Loans
Unlike SBA disaster loans, traditional SBA loans are not funded directly from the SBA. They are, instead, originated by any number of SBA-approved lenders and then guaranteed or backed by the SBA. The loan process starts with a sanctioned SBA lender. This means that you do not apply directly to the SBA for a traditional SBA loan.
Applying for a traditional SBA guaranteed loan initially involves submitting a business plan with financial projections, tax returns for three years (personal and business), loan application, and a personal financial statement. Once these items have been submitted, the SBA approved lender will review the tendered items and make one of three findings:
A) Yes, they can lend you the money. This means that your application was strong enough to secure the financing without an SBA backing or guarantee.
B) No, they cannot lend you the money. This signifies that the lender is unable or unwilling to fund the loan even with the SBA providing a guarantee.
C) They might be able to lend you the money. In this situation, the lender is indicating that they are interested in funding the loan but probably want to pursue an SBA guarantee. The guarantee provides additional insurance on the loan, on behalf of the lender, if the borrower defaults.
Traditional SBA loans predominantly fall into the following categories:
1) SBA 7(a) loans – can be used for most business purposes. These may include buying real estate, construction, renovation or leasehold improvements; buying furniture, fixtures, machinery, and equipment; buying inventory; and working capital. The specific terms of SBA loans are negotiated between a borrower and an SBA-approved lender.
2) SBA 504 loans – similar to SBA 7(a) loans and can be used for buying real estate, leasehold improvements or for the construction, renovation of a building; and/or for buying machinery and equipment. The 504 loan program offers borrowers a fixed rate for 10 or 20 years, with lower fees than the 7(a) program, and often a lower down payment of 10%.
3) SBA Micro-loans – provides business and certain non-profits with loans up to $50,000. These loans are generally short in duration (six years or less) and charge a higher interest rate than the 7(a) or 504 loans.