The recent tornadoes in the Midwest and the devastation they caused bring home the need for businesses to have disaster plans. Unfortunately, many don’t and scramble to recover after suffering damage or destruction to their premises. The American Red Cross says that 40 percent of small businesses never reopen following such severe loss. However, there are ways to get your business back on its feet—as long as you have the cash to support your efforts. Here are three ways to find the cash you need to rebuild.
Make insurance claims
If you have coverage for your business property, contact your insurance agent or the insurance company immediately so you can start the claims process. Most companies have claims hotlines to accelerate the claims process.
Once the basic information has been submitted, expect to be contacted by an insurance adjuster. This is a person sent by the insurance company to assess your damage and decide on the amount of your recovery under the policy.
Don’t necessarily accept the offer from the insurer. Do your own legwork to boost your recovery. For example, obtain several estimates for repairs of your property. These can be submitted to your insurance company and likely will be factored into the amount that the company will pay you.
You may need to bring in other experts:
- If you think the insurance company is trying to underpay you for your loss, don’t hesitate to contact an attorney to help you obtain a fairer settlement.
- If you have business interruption insurance, consider engaging a forensic accountant who can help you show the insurance company what you expect losses to be and what should be paid under the policy.
- If you own your premises and there has been substantial damage, you may need a structural engineer to assess whether it’s safe to rebuild or necessary to demolish what’s left and start over; this can affect the amount of your recovery.
For more information about small business insurance and links to state insurance departments, go to InsureU for Small Business.
Apply for an SBA disaster loan
While the U.S. Small Business Administration (SBA) usually doesn’t make loans directly to small businesses, there is an exception in the case of disasters. There are two loan programs to help, and together can provide funding of up to $2 million:
- Business physical disaster loans. These loans, which have repayment terms up to 30 years, help replace damaged property or restore it to pre-disaster condition. Proceeds can be used for real property, machinery and equipment, and inventory. The interest rate won’t be more than 4 percent if the business does not have credit available elsewhere (8 percent if credit is available elsewhere); the SBA determines whether the applicant has credit available elsewhere.
- Economic injury disaster loans. Regardless of any physical damage, if a business has an economic injury, it can obtain an SBA loan for working capital. Substantial economic injury means the inability of a business to meet its obligations as they mature and to pay its ordinary and necessary operating expenses. The interest rate is capped at 4 percent and the repayment terms are fixed according to a business’ ability to make payments (but no longer than 30 years).
Check the SBA’s Office of Disaster Assistance for a listing of current disaster declarations and links to disaster loans.
Note: Farmers may be eligible for special assistance through various programs from the Department of Agriculture.
File for a tax refund
If you suffer damages that are not covered by insurance, you can deduct the property loss on your tax return. Unlike personal casualty losses, there is no limit on the amount you can write off. For uninsured losses in an area declared by FEMA to be eligible for federal disaster relief, you have the choice of deducting it on the return for the year of the disaster or the prior year. By choosing the prior year, you may be able to obtain a cash tax refund now.
Special tax rule for inventory. If your inventory loss is from a disaster in an area designated by FEMA for assistance, you can opt to deduct the loss on your return or amended return for the immediately preceding year. But be sure to decrease your opening inventory for the year of the loss so that the loss will not be reported again in inventories.
FEMA posts a list of designated disaster areas. Rules on deducting disaster losses can be found in IRS Publication 547, Casualties, Disasters and Theft Losses.
An ounce of prevention goes a long way in disaster planning relief. Review your insurance coverage before anything happens. At the least, make sure you have adequate data backup to protect your important business files and financial information.