Hurricane Sandy was one of the most devastating natural disasters in U.S. history, and many businesses have still not recovered. Many affected business owners may not be aware, however, that the Small Business Administration’s Disaster Loan Program has been reopened and is accepting applications through December 1. The author provides details, including which documents need to be submitted, and also walks prospective applicants through each step of the process.
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Four years have passed since Hurricane Sandy reached landfall in October 2012. As the second costliest Atlantic storm in U.S. history, Sandy caused physical damage and business interruption losses amounting to approximately $75 billion, with New York and New Jersey each incurring more than 40% of those losses (Nydia Velázquez, “Despite Reforms, SBA’s Sandy Response Lags: A Report Prepared by the Democrats of the House Committee on Small Business,” May 2013). As a result, Congress passed the Disaster Relief Appropriations Act of 2013, which appropriated $779 million to the Small Business Administration (SBA) for the purpose of disaster assistance.
Despite this, many Sandy victims were unable to obtain loans to assist with their recovery. Applicants, especially small businesses, experienced extensive delays in the disaster loan application, processing, and disbursement process. According to the September 2014 U.S. Government Accountability Office’s (GAO) Report to the Ranking Member, Committee on Small Business, House of Representatives, GAO-14-760, Physical Disaster Business Loan (PDBL) applications were processed in approximately 45 days, while Economic Injury Disaster Loans (EIDL) took about 38 days. The average processing time peaked in March 2013, five months after Sandy, to an average of 60 days from receipt of loan application to loan decision for business loan applications. Approved loans required an average of 66 additional days to close a PDBL and 43 additional days to close an EIDL. While some loan applicants waited this long for the full amount of their funds, many sought other means of financial assistance. According to the American Sustainable Business Council and Small Business Majority, the median downtime cost for small businesses in 2013 was $3,000 per day. In addition, the SBA reported that up to 90% of small businesses receive the majority of their business from within two miles of their location; these statistics sum up the impact of Sandy on small businesses. For most business owners, waiting three or more months for financial assistance meant certain failure.
The SBA has explained that the delays were due to high volumes of loan applications, understaffing, inexperienced loan officers, and hardware and software challenges. In addition, loans were processed on a first-in, first-out basis, and the SBA’s Office of Disaster Assistance processed disaster loans for both homeowners and businesses; after Hurricane Sandy struck, the SBA was inundated with four times as many homeowner applications as business applications, which left business owners waiting behind the homeowners who submitted before them. The SBA also reported that 55% of all disaster loan applications were filed electronically, which also contributed to the backlog. Business loan approval rates were at a record low of around 25%, as evidenced by Exhibit 1. Furthermore, of the more than 4,000 business loans approved, approximately 38% were canceled by January 2014, three-quarters of these at the applicant’s request. Reasons cited for the cancellations included the availability of alternate sources of funds, frustration with loan processing delays, and changes in plans.
New Jersey and New York Hurricane Sandy Business Disaster Loan Applications Received and Approved (as of January 2014)
Reopening the Disaster Loan Application Filing Period
In the months after Hurricane Sandy, the SBA addressed these challenges, rectifying some of the issues outlined above and working to address the remaining issues in order to ensure that loan processing for future disasters will be more seamless. In addition, in an effort to offer assistance to homeowners, renters, and small businesses still in need of financial assistance, Congress passed the Recovery Improvements for Small Entities (RISE) After Disaster Act of 2015 on November 25, 2015. This act enables the SBA administrator to reopen the filing period for low-interest disaster loans for a period of one year. Therefore, Sandy survivors can file for PDBLs or EIDLs until the new filing deadline of December 1, 2016.
There are two types of direct loans available to businesses affected by Hurricane Sandy. PDBLs are loans to repair or replace property that was damaged by the storm, like real estate, as well as fixed assets, like machinery and equipment. In contrast, EIDLs provide working capital to small businesses that cannot obtain financial assistance elsewhere to aid them in meeting their operating expenses while they recover. Home Disaster Loans are also available for homeowners and renters seeking to repair or replace their damaged homes or personal assets, as well as physical disaster and economic injury loans for nonprofit organizations. Exhibit 2 details the available loans, maximum dollar amounts, interest rates, and applicable terms.
SBA Disaster Loans for Small Businesses, Hurricane Sandy Reopening, Dec. 1, 2015 to Dec. 1, 2016
The Loan Application Process
Small businesses and homeowners can apply for loans online using the Electronic Loan Application (ELA) on the SBA’s website (https://disasterloan.sba.gov/ela) or at their local Small Business Development Center (http://www.ctsbdc.com; https://www.njsbdc.com; http://www.nyssbdc.org). Interested applicants can also go to the SBA’s website (http://www.sba.gov/disaster) or contact the SBA’s Disaster Assistance Customer Service Center [(800) 659-2955 or disaster [email protected]].
Hurricane Sandy victims who previously applied for disaster loans and were rejected, as well as those who withdrew or canceled their loan applications, are not precluded from applying again. In fact, they are encouraged to reapply. Since prior documentation may still be in the SBA’s loan processing system, applicants are urged to provide their prior application number.
Supporting Documents Required
Applicants are required to complete the two-page SBA Disaster Business Loan Application (SBA Form 5), as well as submitting the documents outlined below. Note that if a business previously submitted an application with the required copies of federal tax returns for 2009–2011, then only the returns from 2012–2014 are required. Also note that if a return is on extension, a copy of the filed extension is required. In addition, the SBA requires both the IRS forms and the copies of federal returns and associated schedules. Failure to submit both the forms and copies of the returns will result in rejection of the application. In the last filing period, 582 applications were withdrawn because the IRS did not have complete records of the applicants’ business returns.
- SBA Form 159 D, Fee Disclosure and Compensation Agreement. This form is only required for businesses that paid a fee for an independent individual (e.g., CPA, lawyer) to assist with the loan application process.
- SBA Form 413, Personal Financial Statement. All principal owners with a 20% or greater equity interest must submit this form. The data on the form must represent the applicant’s financial status within 90 days of the loan application.
- SBA Form 2202, Schedule of Liabilities. Applicants may use the SBA’s form or submit their own form. Schedules created in computer programs such as Excel or Quickbooks are acceptable.
- SBA Form 1368, Monthly Sales Figures (Only for Economic Injury Loan Applications). Businesses may use the SBA form or provide their own form to list monthly sales figures from 2010 through the present. If exact monthly figures are not available, annualized sales may be divided by 12 months approximate monthly sales. Business owners are also requested to submit a one-year sales forecast, which should be attached to this form.
- Business federal tax returns for years 2009–2014, including schedules.
- Personal tax returns for years 2009–2014, including schedules, of all principals in the business possessing a 20% or greater equity interest, as well as all partners, managers, and affiliates.
- Business federal returns, including schedules, for years 2009–2014, of all affiliate businesses held by any of the principals with a 50% or greater equity interest. Affiliates include parent and subsidiary businesses, as well as any businesses where there is common ownership.
- 2015 federal tax returns, if filed. If business returns have not been filed yet, a 2015 profit and loss statement and balance sheet will suffice. Balance sheets are not required for sole proprietorships.
- Completed and signed IRS Form 4506T, Disaster Request for Transcript of Tax Return, for tax years 2012–2014.
- Completed and signed IRS Form 8821, Tax Information Authorization for tax years 2009–2011 (if not submitted with previous application).
- Listing of financial resources received from other sources, including insurance disbursement. The list should indicate the source of the funds, type of assistance (e.g., grant, loan), and the terms, including interest rate, maturity date, collateral, and cosignee.
- Losses incurred/recovery costs to date, including property damage or loss and all sources of economic injury (e.g., increases in rental or lease costs). Applicants should document all personal resources used to aid in the recovery process, as well as any other information that will delineate the cost of the process.
Homeowners are required to submit only the following forms:
- SBA Form 5c, SBA Homeowner Loan Application.
- Federal tax returns. Self-employed homeowners are required to submit 2014 personal and business tax returns. Business financial statements are not required, and homeowners that are not self-employed are not required to submit returns.
- Completed and signed IRS Form 4506T, Disaster Request for Transcript of Tax Return for 2014.
To simplify the loan application process, the SBA is in the process of streamlining required documentation.
The required forms for not-for-profit organizations are below:
- IRS Forms 8821 for years 2009 through 2011, and Form 4506T for years 2012–2014.
- Federal tax returns for years 2009–2014
Loan Processing Improvements
In the first SBA loan filing period after Hurricane Sandy, collateral was required for all PDBLs over $14,000 and all EIDLs over $5,000. As shown by Exhibit 2, the SBA has increased these amounts to $25,000 for each type of loan. Renters applying for loans do not require collateral.
Loan turnaround time.
The SBA’s current goal in the wake of Hurricane Matthew is to reduce loan processing time to no more than 21 days. Applicants will then recieve their finalized loan documents and will be contacted to close on their loans shortly thereafter.
The key to timely loan processing is to ensure that all necessary documents are submitted completely and accurately.
Reduced documentation requirements.
To simplify the loan application process, the SBA is in the process of streamlining required documentation. As an example, the SBA has modified the Code of Federal Regulations, Title 13: Business and Credit Assistance, section 123.6—What does SBA look for when considering a disaster loan applicant? Previously, this section read in part:
There must be reasonable assurance that you can repay your loan out of your personal or business cash flow, and you must have satisfactory credit and character.
As of April 24, 2014, this has been modified to read:
There must be reasonable assurance that you can repay your loan based on SBA’s analysis of your credit or your personal or business cash flow, and you must also have satisfactory character. (61 FR 3304, Jan. 31, 1996, as amended at 79 FR 22862, Apr. 25, 2014)
Prior to this modification, the SBA analyzed both personal and business cash flow for every disaster loan applicant, which was a very time-consuming process. The SBA now has the option of reviewing either cash flow or the applicant’s credit score in order to determine repayment ability.
Separate tracks for homeowners and businesses.
One year after Sandy, at the recommendation of the Hurricane Sandy Rebuilding Task Force, the SBA created two separate tracks for loans, one for business disaster loans and one for homeowner loans. This will ensure that loan applications for small businesses will be addressed separately from homeowner loans, which will expedite processing.
Recommendations for Loan Applicants
The following recommendations were compiled by the author after interviewing Hurricane Sandy victims who had applied for SBA loans shortly after the storm struck and addressing these issues with SBA representatives. The purpose is to assist applicants in better navigating the loan application system currently in place.
Online loan application submission.
While the easiest way to apply for loans is via the SBA’s website, applicants must keep in mind that the supplemental forms listed above must be submitted along with the application. Although all of the documents do not have to be submitted at once, once an applicant submits the online application, he only has seven days to provide all the necessary documents. In addition, once it is submitted, an SBA representative will review the application to ensure it is complete. This process could take several days, which means that the seven-day window would now be reduced to a three- or four-day window. After the seven days, the applicant’s file is closed and a request must be submitted to the SBA to reopen it. Due to these tight time constraints, it is recommended that an applicant compile all necessary documents prior to submitting the application. The key to timely loan processing is to ensure that all necessary documents are submitted completely and accurately. Loan processing is delayed by incomplete and erroneous applications. Applicants who are uncertain about the process are encouraged to visit the local Small Business Development Center or call the toll-free number for assistance.
As indicated above, the SBA will review applicant credit scores to determine loan eligibility. Applicants are encouraged to provide information about credit scores prior to Hurricane Sandy, since this information may provide additional proof of their creditworthiness.
Proof of loss.
Upon approval, an SBA loss verifier will contact the applicant to determine the estimate of loss. The applicant is encouraged to provide receipts, photos, construction contracts, and any other proof of the physical damage and economic impact Hurricane Sandy has had on the home or business. While photographs may not be required, they may aid the loss verifier in assessing the damage incurred to the structure, equipment, landscaping, and contents, as well as costs for debris removal and cleanup, septic and sewage issues, and land improvements.
Negotiation of loan terms.
After the loss verification, approved applicants will be contacted by a loan officer. The loan officer will provide the documents detailing the loan amount, terms, and expected timeframe for distribution of funds. If an applicant believes that the terms or the dollar amount could be more favorable, she should request that they be reviewed. Please note that there is no guarantee that the terms or loan amount will be adjusted; however, in some circumstances, a request may result in more favorable terms.
Before a loan can be closed, the applicants must have insurance policies in force that will cover both contents and structure.
Although the documentation from the SBA does not provide details on this topic, applicants with poor credit history or poor debt-to-income ratios may request a cosigner for a disaster loan. The cosigner must provide the same documents to the SBA as the applicant, including federal tax returns.
All homeowners and businesses requesting loans exceeding $25,000 will require collateral. Many Sandy victims have expressed concern about using their remaining assets as collateral for a loan. Applicants should be aware that the collateral required may not be a dollar-for-dollar match; for example, if the applicant is eligible for a $50,000 loan, he might not be required to provide collateral worth $50,000.
Before a loan can be closed, the applicants must have insurance policies in force that will cover both contents and structure. Businesses are required to have a flood insurance policy, while homeowners must have both a homeowners and flood insurance policy. Loan applicants should be aware that for all loans in excess of $25,000 (excluding loans to renters), the SBA will be listed on these insurance policies as an endorsee, as protection for the SBA should the applicant default on the loan. Insurance companies are required to list any other endorsees on the policy, even if it is the SBA for a prior disaster.
There are no loan origination or closing fees payable to the SBA for disaster loans, since the applicant will be completing all the necessary steps on her own behalf. Once the loan documents are provided to the applicant, she is responsible for obtaining two notarized copies of the loan agreement, having the loan recorded at the county clerk’s office, and obtaining the necessary documents from her insurance agent. The original documents must then be submitted to the SBA to finalize the loan. The applicant is encouraged to request the assistance of the SBA case manager to ensure that the closing process goes smoothly. The case managers have legal backgrounds, making them a good resource for applicants.
A Smoother Path to Recovery
It is obvious from the above that the SBA experienced some challenges with disaster loan processing after Hurricane Sandy. This led to a great deal of frustration on the part of Sandy victims, which is why the disaster loan program has been reopened. It is also obvious that the process, while not simple, is manageable for individuals and businesses still seeking financial assistance. Current applicants will now have the benefit of increased loan amounts that do not require collateral, as well as faster turnaround times for approved loans and more assistance from the SBA.
CPAs and their clients should have the necessary documents on hand from the 2016 tax season, so gathering them for submission should be relatively stress-free. With the December 1 deadline fast approaching, however, any applicants who have not yet submitted an application should do so now.