Traditional loans are considered high-risk for small business financing in the immediate aftermath of a disaster. Small businesses need access to gap/bridge financing, as well as low-interest, flexible terms and/or forgivable loans, particularly during risky economic times.
The following are practical steps that an economic development organization and/or chamber of commerce can take prior to a disaster so that small and medium businesses have access to the capital they need in the event of that a major catastrophe has destroyed or severely damaged their business assets.
Step 1: Identify sources of capital that can be made available to businesses after a disaster
Step 1a: The appropriate economic development organization should identify local financial institutions, foundations and other private organizations that could provide capital
This will include outreach to local banks, credit unions, community development financial institutions (CDFIs), other alternative lenders, foundations and other private organizations to create a response strategy. It is important to discuss what financial institutions need to be able to provide financing quickly (e.g., CDFIs may need a community foundation or other private organization to provide a loan loss or guarantee).
Step 1b: Identify state and federal programs for lending and grant making
The U.S. Small Business Administration (SBA) provides low-interest disaster loans to businesses of all sizes to repair or replace damaged or destroyed business assets (property, equipment, inventory, etc.). In addition, the U.S. Economic Development Administration (EDA) and the U.S. Department of Housing and Urban Development (HUD) have funds to be used for establishing local, post-disaster revolving loan programs. A list of federal agencies and their economic development-related programs provides more information.
Step 1c: Consider establishing the structure of a revolving loan fund in the absence of private sector financial sources.
Another role of EDOs is to help establish financing programs such as a revolving loan fund, bridge loan program or business grant program with local, state and federal sources of money. The EDO should not seek to replace private financial sources, but should serve businesses that cannot access traditional sources of financing.
- Revolving loan funds are well-structured for long-term financing since the repayment of old loans is used to finance new loans. RLFs can be established using federal funds (EDA and HUD provide RLF funds) or state/local funds (such as the Louisiana Revolving Capital Fund). The EDA Revolving Loan Fund Program awards competitive grants to local and state governments and other development organizations to establish RLFs. HUD’s CDBG program can also be used to fund RLFs. They typically target job creation specifically for low and moderate income individuals.
- A bridge loan program provides working capital to businesses after a disaster but before the business is able to secure funds from other sources like insurance claims, renewed profits, and federal financing assistance. The idea is that the bridge loan can be paid back after the business has received these other sources of funding.
- A business grant program targets particularly devastated businesses. A grant or forgivable loan can help speed recovery when a business is uncertain about incurring more debt. Funding for this program typically comes from state and local resources. For example, the State of Iowa created the Jumpstart Iowa Small Business Assistance Program to provide short-term financing to small businesses before an anticipated $85 million CDBG grant was scheduled to be disbursed.
Step 1d: Work with these institutions to coordinate a response strategy to be executed in the event of a disaster
Before a disaster, EDOs can bring local banks to the table to discuss how they can make business loans available for disaster preparedness and recovery. Although federal grants and loans are invaluable resources, these are typically implemented only after a disaster and may come with a unique set of federal requirements. Further, communities may have to wait months for these funds to come through and thereby waste valuable recovery time. Local lending programs can more flexibly meet the needs of businesses through either working capital loans or long-term financing.
In Galveston, Texas, the lead economic development organization, GEDP, met with local banks shortly after Hurricane Katrina to discuss a multi-million dollar fund to provide local businesses with working capital (cleanup and emergency repairs) after a disaster. After Hurricane Ike struck Galveston in 2008, the fund was deployed immediately to assist small and medium-sized businesses with pressing capital needs.
Step 2: Identify technical assistance resources for small and medium-sized businesses
Small Business Development Centers (SBDCs), local business colleges, Manufacturing Extension Partnerships (MEPs), CDFIs and other non-profit organizations often develop a list of technical assistance providers or provide their own staff to advise small and medium-sized businesses. It is important to establish a network of these support organizations that can quickly get to work with businesses.
Step 3: Identify other economic recovery resources and funds for operational financing
Local economic development organization and chambers of commerce should seek to identify funding mechanisms for post-disaster recovery initiatives, including the means for continuing their own operations in the event that their funding is severely reduced after a disaster.
Step 4: Advocate for local government to create a reserve fund and purchase insurance to prepare for a disaster
As one might expect, public funds are severely restricted after a disaster. Local governments that either have established a reserve fund or purchased disaster insurance are in a much stronger position to respond to increased service needs after a disaster. Economic recovery stakeholders should educate local government officials on this need and advocate for such preparations.
Step 5: Engage community stakeholders in a discussion about devoting a percentage of disaster recovery funds for economic recovery purposes
Encourage discussion around the importance of determining an amount based on an economic recovery needs assessment. After a disaster, local government officials are often pressured to focus recovery funds solely on social and housing needs, which can leave meager funds for important economic recovery initiatives.
Step 6: Develop a strategy for securing economic recovery incentives in the event of a disaster
Local and state tax incentives related to property, equipment or investment can also be used as financing mechanisms. Typically, incentives are focused on reducing the cost of doing business, increasing the flow of capital for business recovery and growth, persuading businesses or real estate investors to further invest in impacted areas. It is important to be aware of how other communities and states have developed or advocated for incentives to encourage redevelopment and re-investment in disaster-impacted areas.
- Property Improvement/Restoration Incentives: These can be used to defer property taxes on renovations and improvements to facilities.
- Equipment/Machinery Incentives: This includes exemptions on property, sales, usage, franchise, or state income taxes on new building materials, machinery, and equipment.
- Retention/Reinvestment Incentives: There are based on saving jobs and investments of a company that may be in danger of closing.
There is a precedent for federal government action to address major recovery needs by providing federal tax incentives or tax-free bonding. Below are the two examples provided within the last 15 years for the most severe disaster-related events.
- GO Zone Bonds: Gulf Opportunity (GO) Zone bonds were passed after Hurricane Katrina in 2005 to encourage reinvestment in Louisiana, Alabama, and Mississippi. GO Zone bonds served as tax-exempt bonds that essentially serve as a low-interest loan for businesses that issue them. Businesses could also receive tax incentives for redeveloping property in the zone area.
- September 11 Bonds: After September 11, Congress provided tax-free bonding authority to New York for the rebuilding of the destroyed area. Half of the bonds were allocated by the state’s governor and half by the mayor of New York City. This enabled local and state government agencies to raise more capital to fund infrastructure projects.
- The Small Business Administration (SBA) provides low interest disaster loans to businesses of all sizes and private to repair or replace real estate, personal property, machinery & equipment, inventory and business assets that have been damaged or destroyed in a declared disaster.
- Small Business Development Centers (SBDCs) offer technical assistance to small businesses such as business plan development, marketing, etc., to help them grow or recover after a disaster.
- The Council of Development Finance Agencies (CDFA) offers an online resource database that lists links, publications, fact sheets, articles and other items that support the development of financial opportunities.
- Seedco Financial is a CDFI that has provided financial and technical assistance resources in post-disaster situations such as New York City post-September 11th and Southeast Louisiana after Hurricane Katrina. Its website provides program details, resources, and studies that evaluate its disaster-recovery initiatives.
- The World Trade Center’s Small Business Recovery Fund (WTCSBRF) targets small businesses in the five boroughs of New York City impacted by the terrorist attacks on September 11th, 2001. The fund was established by the SBDC, New York Business Development Corporation and private sector companies.