United States
Updated: February 20th, 2024
SBA disaster loans have become a go-to financing option for small businesses in a pinch. The SBA offered these low-interest loans way before COVID-19 took center stage, but they’ve involved the program to include COVID-specific and non-COVID-related loans.
For most small business owners, an SBA disaster loan is a last resort after a “declared disaster” has impacted their business. But what happens if the SBA declines your SBA disaster loan application? What can you do next?
Below, we’ll walk you through the steps you can take to move forward after a rejected application. You’ll learn why your loan was denied, how to appeal your loan denial, and where to search for other sources of quick, reliable financing.
Let’s get you moving forward.
The SBA has strict requirements for SBA disaster loan eligibility to ensure a fair process that prioritizes the right businesses. They look closely at four primary considerations:
Your business must operate in a designated disaster zone to qualify for a disaster loan. Use the SBA’s website to find a list of current declared disasters. These include locations impacted by natural disasters, civil unrest, wildfires, explosions, pandemics, and more.
Some loans, like COVID-19 Economic Injury Disaster Loans (EIDL), aren’t as location-relevant—any small business, agricultural business, or nonprofit in a US state, territory, or Washington D.C. can apply for an EIDL.
However, if you’re applying for another location-specific disaster loan, you’ll need to double-check your business’s address to make sure you qualify.
The SBA backs SBA disaster loans, but banks and alternative lenders still do the actual lending (except for with EIDLs—the SBA administers those themselves). Thus, the SBA will examine your credit score to evaluate your level of risk.
Disaster loan requirements usually hover around a minimum of 620, but a score lower than that doesn’t necessarily mean you won’t qualify. The SBA also considers other factors like revenue, rent history, insurance, and other timely payments to determine your eligibility. This means businesses with poor credit still have a chance.
Repayment is possibly the most important criteria. Like with any loan, the lender will want to be confident you can repay the loan in full—this includes principal and interest. If your business has suffered a revenue-crushing disaster, your lender might not be convinced a loan will help you rebound quickly to repay the loan.
However, SBA disaster loans do provide a helpful relief period. This gives businesses a 1-year deferment on loan repayments and longer terms to stretch out the payments and mitigate the monthly economic impact.
Lastly, the SBA wants your business to provide collateral to alleviate risk. If you need an SBA disaster loan of more than $20,000, there’s a good chance the lender will insist on collateral.
Collateral could be your business property, equipment, or other assets. It could be your personal assets, too. However, while the SBA wants to see collateral with these loans, it’s not always a make-or-break factor.
If you believe your SBA disaster loan has been denied unfairly given the above factors, then you can submit a request for reconsideration to the SBA Disaster Assistance Processing and Disbursement Center (DAPDC). However, note that this process isn’t famous for being quick—it’ll take some time.
If your appeal is denied, then you can attempt to appeal directly with the Director of the DAPDC, but this last decision is usually final. Fortunately, if your appeal is rejected, you’re not out of options. You still have other financing alternatives available to your small business.
First, let’s look at FEMA grant funding—then, we’ll look at debt financing alternatives.
Many forms of FEMA aid and assistance are only available if you’ve been formally denied an SBA disaster loan. Unlike a loan, you don’t repay a grant, so FEMA funding has the potential to be a blessing in disguise for your small business.
FEMA offers grants to cover a variety of disaster-related expenses. These include medical, car repairs, equipment, moving, storage, and more. Do your research into FEMA grants to see if you can find a grant that matches your business’s use case.
If you can’t find a grant for your business or are uneligible, then it’s time to start looking at debt financing alternatives.
You can find traditional and non-traditional loans to get your business out of a precarious situation. However, you’ll need to do your due diligence to ensure you’ll be able to pay off any new debt you take on.
Below are the four best disaster-assistance funding options for your business to consider:
A business line of credit is a flexible financing option that extends your working capital to cover just about any business-related need. The best part is that you’ll only pay interest on the portion of the funds you borrow, so if you only end up dipping a little bit into your line of credit, then you’ll only owe a little bit.
You can hold on to a business line of credit as a disaster-prevention or recovery tool—either way, it’s a great financing alternative to have in your back pocket.
Term loans can get you large amounts of financing with long repayments terms, which is what you need when recovering from a disaster. Plus, you can use term loans to finance practically any business expense.
If you have a lot of cash tied up in unpaid invoices, you can use accounts receivable financing (also known as factoring) to liquidate that capital. Accounts receivable financing lets you trade your IOUs at a slight discount for immediate cash now.
Equipment financing can help you replace any significant assets you lost in a disaster. Equipment loans usually have generous repayment terms and typically have fair interest rates, making them perfect for financing expensive equipment investments.
If you’ve been denied an SBA disaster loan, you have options. Consider appealing your rejection, and if that proves unfruitful, move forward with looking at FEMA grant funding. After FEMA funding, look at debt financing alternatives—there’s a variety of loans out there to help your business through the difficult recovery process.
While debt financing may be more expensive than an SBA disaster loan, it still gives your business the much-needed capital it needs to come out of a disaster on top. Start the appeal process as soon as possible to get your business moving onwards and upwards.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.
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