© Seamartini | Dreamstime.com - Businessman Repairing Cracked Piggy Bank Photo

Financial Recovery after a Disaster

© Seamartini | Dreamstime.com - Businessman Repairing Cracked Piggy Bank PhotoThe Atlantic hurricane season ended on November 30 without any major storm. It’s been 10 years since any big hurricane has hit Florida, and as a resident of this state I’m relieved. Nonetheless, other parts of the country have experienced severe weather and significant property losses that aren’t fully covered by insurance.

In the week of Thanksgiving alone there were ice storms in parts of the Midwest that caused substantial damage. How can small businesses adversely impacted by a disaster—whether caused by storms, fires, or civil unrest—adequately recover?

Government help

The Federal Emergency Management Administration (FEMA), the Farm Service Agency (FSA), and the Small Business Administration (SBA) offer some assistance for financial recovery.

Superstorm Sandy loans revisited

The October 2012 storm devastated many small businesses in New Jersey and New York. Unfortunately, many of these businesses were unable to obtain disaster relief loans from the Small Business Administration. Congress finally responded favorably to the plight of affected small businesses.

The Recovery Improvements for Small Entities (RISE) after Disaster Act of 2015, which was signed into law on November 25, 2015, expands SBA authority in order to provide relief to small businesses and individuals located in parts of 11 states that suffered damage or economic losses from Superstorm Sandy. For example, the new law authorizes the SBA to guarantee up to 85% of an express recovery opportunity loan of up to $150,000 to a small business located in a disaster area if the concern has the capacity to repay it. The guarantee fee, unless waived, and except in certain cost circumstances, shall be the same as the one the SBA would collect if the guarantee rate were 50%.

Affected small businesses can apply for loans to:

  1. repair, rehabilitate, or replace property damaged or destroyed because of the storm; or
  2. assist a small business that suffered substantial economic injury because of it.

Check out tax breaks

Disaster losses for businesses that are not covered by insurance are fully deductible (there’s no income threshold or other dollar limit). What’s more, you can choose to deduct losses in a federally-declared disaster area on a prior year’s tax return and receive an immediate tax refund rather than waiting to file a return for the year of the disaster. This gives you cash to rebuild now. Find details about deducting disaster losses from the IRS or talk with your tax advisor.

Lessons for the future

Seeking relief from the SBA can be avoided by having adequate private insurance. When cash is tight, cutting back on insurance is often one of the first things to happen. Unfortunately it can prove to be a big mistake. Budgeting for good coverage is a good business practice.

Consider having:

  • Coverage for property damage. Typically this is included in a business owner’s policy (BOP).
  • Business interruption insurance. This covers a business’ ongoing costs, such as payroll, rent, and insurance premiums. It may pay for rent in temporary quarters until you can return to your usual location after repairs. It may also provide coverage for lost profits during a set period.

Another strategy is to create a rainy day fund that can be tapped in case of a disaster. The fund can supplement insurance coverage, which usually is only a partial solution for financial losses. Of course, it isn’t easy to segregate money for this purpose, especially when there are current needs for cash. Still, to the extent possible it makes weathering a storm so much easier.

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