Stephen Barnes, who directs the Economics and Policy Research Group at LSU’s E. J. Ourso College of Business, says business owners need to be careful not to overextend themselves when financing flood recovery. It doesn’t hurt to apply for an SBA loan, he says, but don’t be cavalier about taking on debt. That goes double for traditional bank loans, which will have less generous terms. Photography by Don Kadair
OK, first things first: Was your place of business among the thousands damaged by the August flood? The deadline to apply for a U.S. Small Business Administration Business Physical Disaster Loan is Oct. 13. If you’re reading this before the deadline and haven’t applied, stop reading and do it now.
“The most important advice we can offer to businesses is to apply to determine for what they’re eligible, and choose whether to accept or reject the offer afterward,” says Ansley Zehnder, senior vice president of marketing with the Baton Rouge Area Chamber. “Even if a company chooses not to proceed with an SBA disaster loan, the application process can help to crystalize a business owner’s recovery planning.”
Businesses and nonprofits that suffered physical damage can borrow up to $2 million from the SBA. The agency also offers up to $2 million for small businesses and nonprofits in declared disaster areas that need working capital, even if they haven’t suffered physical damage. The deadline to apply for an Economic Injury Disaster Loan is May 15, 2017.
BRAC recommends setting up an appointment with an adviser at the Louisiana Small Business Development Center, which offers free consulting services. A certified financial planner also should be able to help you sort through your options.
Stephen Barnes, who directs the Economics and Policy Research Group at LSU’s E. J. Ourso College of Business, was involved in a major research effort measuring Louisiana’s recovery from the 2005 hurricanes. While the August flood was no Katrina, there’s at least one major takeaway from that report to keep in mind: Recovery takes time.
In the meantime, he says, be careful not to overextend yourself. It doesn’t hurt to apply for an SBA loan, but don’t be cavalier about taking on debt. That goes double for traditional bank loans, which will have less generous terms.
Further complicating these decisions is the possibility of additional help from the federal government. Congress has appropriated $500 million in Community Development Block Grants for flood recovery. About $400 million or so is expected to go to Louisiana, in what state officials hope is only a down payment on the $2.6 billion needed, says Pat Forbes, director of the state’s Office of Community Development.
How Louisiana will use its CDBG money has not been decided, but the program can be used to fund grants and loans for housing, infrastructure and economic development.
“With that initial amount, I would expect the most likely priorities to be in the housing realm,” Forbes says. Recipients of SBA loans would not be eligible for CDBG money for the same purpose.
Companies face new risks when an entire community is trying to get back on its feet, Barnes says.
“Businesses that have the resources to rush out and get back up and running may see mixed success,” he says. Being the first to open in an area can be an advantage, unless the customer base has scattered.
A lot of business owners are “in a holding pattern,” says Dawn Starns, who directs the Louisiana chapter of the National Federation of Independent Business. In Baton Rouge, the population base is large enough that a business owner can feel reasonably confident about coming back. But in Livingston Parish, she suggests, the decision might be a little harder.
“It really does make a business owner say, ‘If I’m going to extend myself this much further, am I going to be able to repay myself in the long term?’” she says.
If you have an outstanding loan, you may want to contact your lender to ask about loan modifications such as delayed payment options, says Rudy Aguilar Jr., managing member with the McGlinchey Stafford law firm. It’s a good idea to reach out to vendors, suppliers and customers to make sure they know you’re back in business. And of course, it’s important to take care of your own people.
Jean-Paul Perrault, also with McGlinchey Stafford, says the firm’s experience after Katrina indicates that out-of-town customers may be happy to send you extra business to help you get back on your feet.
Some 401(k) retirement plans allow you to borrow up to half of what you’ve saved, up to $50,000, and pay yourself back at a reasonable interest rate, says certified financial planner Chad Olivier. And some plans allow you to make a hardship withdrawal, but that should probably only be considered as a last resort.
If you withdraw from a 401(k) before age 59.5, you’ll pay income tax on the money plus a 10% surtax, and you’ll be depleting your retirement at the same time. While U.S. Sen. Bill Cassidy has called for a waiver of the 10% penalty for early retirement plan withdrawals, the penalty still was in place as of publication of this story. However, the IRS says plan sponsors that don’t already allow hardship withdrawals can amend their plan retroactively.
“They made it easier to obtain a hardship withdrawal, but they didn’t change the consequences of it,” says John McDermott, a tax and estate planning attorney with Taylor Porter.
And there are some non-SBA loans out there meant to aid in disaster recovery. For example, TruFund Financial Services, a nonprofit lender that targets minority- and women-owned businesses and those located in underserved communities, is partnering with Capital One to provide loans for affected businesses at 6% interest for the first two years and 8% thereafter, says Myla Poree, managing director for Louisiana with TruFund. The nonprofit also plans to offer workshops focused on sustainability and resilience.
“Obviously, disasters happen,” Poree says. “We need to make sure that, when it happens again, we’re prepared for it.”