I have a small minority-owned business located on Lake Pontchartrain, about 30 miles from New Orleans. We collect commercial debt all over the country. We evacuated to Memphis with our computer servers and essential business records before Hurricane Katrina, then spent about two-and-a-half weeks trying to get back home.
After returning, we have managed to salvage our building. But as you might imagine, being displaced and without water and power has crippled my firm and all the other small businesses locally. I've reached out to many large corporations, asking them to send contracts my way so I can put unemployed people to work, but have received no response. We are going to apply for a disaster loan from the SBA. Will a personal bankruptcy affect our chances of getting the loan?
-- B.B., Mandeville, La.
The Small Business Administration does look at your credit report when evaluating disaster-loan applications, experts say. Typically, a bankruptcy affects your record for 10 years, lowering your credit score and making you a higher risk to a lender.
However, each Katrina loan application will get an individual evaluation, says Carol Chastang, an SBA spokeswoman and public liaison.
QUAKE VET. "Several factors are involved in each individual's bankruptcy, and for that reason the SBA would need to look at the circumstances of the situation to make a determination about approving the disaster loan," she says. "For instance, depending on how long ago the bankruptcy was filed, the SBA could possibly approve your disaster loan if enough time had passed."
Roberto Barragan, executive director of the Valley Economic Development Center (VEDC) in Van Nuys, Calif., helped process SBA disaster-loan applications for 10,000 small-business owners who secured $125 million after the 1994 Northridge (Calif.) earthquake. In his experience, business owners whose personal bankruptcy occurred more than three years before they applied for loans and who had been able to reestablish credit in the interim, had a fairly good odds of getting the loans.
"If you have been able to get a mortgage, a car loan, or credit cards, your chances of being approved are higher than they would be if your bankruptcy was as recent as a year ago and your credit score is still below 580 [out of 800]," Barragan says.
TIPS FROM A PRO. Over the years that the VEDC was processing the disaster loans and holding round-the-clock workshops to help business owners apply, Barragan says he picked up some useful information for entrepreneurs:
Unlike bank loans that rely on personal or business collateral, an SBA loan is granted based on your income and ability to repay the funds. Barragan says many small-business owners, who reported minimal income -- or losses -- on their tax returns, found difficulty getting disaster loans unless they had reported spousal or other income.
"Mom-and-pop shops and small retailers often load up on expenses or don't necessarily report all their income," he says. "Unless you have tax returns from the prior three years that show some business or other household income, they will not make you a loan."
Make sure you fully complete your loan application correctly and attach all requested documents before you submit it to the SBA.
"The application isn't extensive, but if you don't have all the pieces together, you will wind up with delays. With tens of thousands of applications going in, the ones that are complete get processed quickly, and the ones that aren't get put in a pile," Barragan says. Some of the Northridge applicants waited up to six years to get final loan approvals.
Companies that lost paper records in the disaster may be able to estimate using the numbers from their most recent tax returns, then have the SBA verify those figures with the IRS. To inquire as to whether you can employ this method, send the SBA an e-mail at email@example.com, or call 800 659-2955.
Get help filling out your application, but don't pay anyone to complete the forms for you -- nonprofit assistance is available. "Work with the SBA or the Small Business Development Center nearest you," Barragan says. His agency currently has a half-dozen loan processors on standby, waiting for applications from the hurricane disaster area.
If you have outstanding federal tax liens, unpaid student loans, or unpaid federal employee taxes, the SBA will likely deny your application. "They are really strict on that, so if you have defaulted on a federal obligation, it will come back to haunt you," Barragan says. "Also, if you have any felony convictions on your record, your application approval will be slowed down considerably and is more likely to be denied."
Most of the companies that the VEDC assisted after the Northridge quake did get loans within two years of applying, Barragan recalls, and scores of small outfits were saved by the government loans. They probably would have gone under without them, he says.
PUSH FOR CONTRACTS. Given your circumstances, you also should pursue any and all help that's available. Along with the SBA loan program, you may qualify for other forms of assistance to business owners offered by state, local, and federal agencies. You can obtain information about those programs from the Federal Emergency Management Agency (800 621-3362), according to the SBA's Chastang.
And don't give up on Corporate America just yet. It takes time to assign contracts and evaluate new vendors, but if you persist in getting your story out and can show that your company is capable, some new clients may well come your way. While Mother Nature can be absolutely brutal, the good side of human nature often shines especially brightly after a disaster.
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