Which Type of Business Loan Is Best After a Flood?

Posted at 07:26h in Small Business Financing by Kelly Hillock

The best type of business loan after a flood depends on the damage you suffer, how much you need to borrow, and how quickly you need approval. Quick cash from an emergency business loan keeps the doors open until insurance payments come through. Meanwhile, SBA disaster loans cover high-dollar fixes for major building damage and other needs insurance doesn’t pay for.

The first step to knowing which type of financing to choose is to identify what is damaged and what you can cover without outside financing and insurance. After you have identified everything that insurance won’t cover (or won’t get you cash quickly enough to pay for) and what you cannot cover with the assets you have available (like cash or selling stocks and bonds), it’s time to look for the right financing option.

There are six types of financing and each has advantages based on the type of damage you may be facing. The table below provides a quick overview of the different options.

Issue / Need	Emergency Loan	SBA Disaster Loan	Equipment / Inventory / Vehicle Financing Loan	Line of Credit	Receivables Financing	Small Business Term Loan
Inventory Replacement	Good		Best	Good	Good
Building Repair		Best				Best
Equipment or Vehicle Repair or Replacement	Good	Good	Best	Good
Building a New Structure		Best				Best
Renting a Temporary Building	Best	Good		Good	Good
Payroll & Wages	Good	Good		Best	Good
Utility Bills, Property Taxes, Insurance, etc.		Good		Best	Good
Protective Gear & Clean-Up Equipment				Best

Emergency Loan

Emergency loans are the best option for immediate needs, because they help to keep your business open. They can give you quick approval and let you borrow enough to cover larger expenses like renting a temporary office while the flood damage to your own building is fixed.

They also don’t limit how you can use the funds, and a single emergency loan can cover anything from payroll to critical equipment repairs and more.

Emergency loans have short term lengths, making them a good choice when you need cash quickly. But if you can wait for approval on other options, then you may want to pass on the higher interest rates that emergency loans come with. Further, these loans may not be large enough for major costs like new construction if your building is demolished or if it is being condemned due to a damaged foundation that is beyond repair.

SBA Disaster Loan

SBA disaster loans are some of the best options for major expenses, like building repair or new construction, thanks to their high dollar limits, low interest rates, and terms like deferring your first payment for 12 months. They cover most business needs when a government-declared disaster hits your area, including those insurance won’t pay for. Plus, terms as long as 30 years make them one of the best options if your property is condemned and you need to buy an entirely new building.

The SBA offers two other loan types for disasters:

Mitigation assistance loans offer funding to protect your physical property from future disasters if you live in frequently flooded areas.

Economic injury disaster loans (EIDL) cover operating expenses, debt payments, or a combination of both when a flood makes it impossible for small businesses, agricultural co-ops, and nonprofits to meet financial obligations. You can only use the funds for approved expenses like health care benefits, utilities, or debt payments, and you’ll have to post collateral if you need more than $50,000.

For immediate cash flow needs, SBA disaster loans won’t be a good option because of slower approval times, given that many flood-damaged small businesses will be applying at the same time.

Equipment, Inventory, and Vehicle Financing Loans

Equipment, inventory, and vehicle financing loans are your best option to replace these items because the items themselves become built-in collateral, getting you low interest rates and fast approvals. You can’t use the funds to buy things other than the financed items though.

Talk with your lender about whether they’ll submit a UCC filing with these types of loans. UCC filings are normal for collateralized loans (loans that require collateral for the lender, also known as secured loans), and the lender uses them to state their legal right to the collateral in public record.

If the lender plans to submit one, review the collateral description on the UCC filing and make sure to use unique IDs like equipment serial numbers or VINs. This ensures the public record shows the exact collateral used for the loan and doesn’t give the lender a general claim on your other assets that shouldn’t be part of the loan. For example, “commercial equipment” encompasses much more than a specific new item of equipment, which you can label as “VIN #1234.”

Line of Credit

An existing line of credit gives you a low interest rate, and you can borrow funds as needed, making it the best type of business loan after a flood to cover fluctuating general expenses like:

Payroll

Utilities

Clean-up and protective gear

Vehicle or equipment parts or repairs

Lines of credit are better for these types of expenses because you only pay interest on the amount you have outstanding versus other loan types where you pay interest on the full amount whether you use it or not.

It’s a good idea to apply for a line of credit if you don’t already have one. Then you’ll have it immediately available in case disaster strikes. As a bonus, using and making regular payments on a line of credit helps build your business credit score by establishing a history of regular, on-time or early payments. Then, if a flood does happen, the higher business credit score may help you secure better terms on other loans you might need.

Receivables Financing

Receivables financing is a great loan option following a flood when you have sales but haven’t collected the cash, since the receivables (or invoices) serve as collateral to get you a fair interest rate. They’re also a perfect option if you just opened and haven’t established a business credit rating because lenders will evaluate the credit rating of your customers, not you.

When the flood hits a large portion of your customers (let’s say you’re the main strawberry supplier for local grocers), receivables financing helps you build customer goodwill by giving you the cash you need now so you don’t have to collect payment from your customers while they’re trying to rebuild as well.

Small Business Term Loan

Small business term loans are your go-to loan type after a flood for major expenses like fixing foundations or teardowns and rebuilds because they provide larger loan amounts and longer terms compared to other options. You won’t get rates as low as an SBA disaster loan even if you have good credit, but you’ll likely get faster approvals than with the government-backed loan.

If you don’t already have a relationship with a large bank, this loan type may not be the right choice if you need quick cash. Approvals aren’t necessarily swift. Also, you’re unlikely to get approved by a large bank if your business doesn’t have an established history with the credit bureaus. That’s when you’ll want to look for alternative lenders like us. Alternative lenders offer quicker turnaround times for small business loans.

All of these loan types cover anything you need to keep your business running after a flood, and can help you rebuild stronger so your company can get back to thriving.