In the aftermath of a natural or man-made disaster, small businesses often need immediate access to capital to tide them over. But lending to a company experiencing extreme challenges following a major weather event, such as a hurricane or an earthquake, is a particularly risky proposition. This is especially true if a business must relocate and rebuild its operations in a new location. How do commercial lenders determine which applicants to approve or reject? The following criteria can help you evaluate a business in crisis — and its ability to bounce back from disaster.
Ascertain the extent of the damage
If possible, visit the company’s location to see firsthand the impact of the natural disaster. Take photographs to supplement the loan application and help those in the underwriting department and on the loan committee gain a detailed understanding of the company’s operations and need for a loan.
While onsite, ask the company for an estimate of the costs to repair, rebuild or relocate their offices and facilities, and how long they anticipate the construction will take. If the company plans on embarking on a significant construction project, consider hiring a suitably qualified consultant to review the costs and feasibility of the company’s plans.
Determine the impact on customers
Take the time to determine the extent of the damage in the immediate vicinity of the company’s location. Look at whether the company relies on a particular customer for a large percentage of its revenue or on a key supplier for critical supplies. Consider visiting its locations to get a better sense of the situation.
Also take into account the number of businesses affected in the immediate area. Generally, the greater the number of businesses bearing the brunt of a natural disaster, the longer it takes an area to recover. And keep in mind that the types of goods and services a company sells play a role in how quickly it recovers from a natural disaster. For example, companies that sell a necessity (such as bread) may see a quicker return to predisaster sales levels compared with a business that sells luxury items (such as jewelry).
Research whether the company has dealt with a disaster before
Some parts of the country experience more extreme weather events than others. Ask the company to identify who within their executive ranks will lead the company’s efforts to return to normal.
Ideally, that person will have previous experience coping with the aftermath of a natural disaster. If feasible, meet with the person tasked with spearheading the company’s recovery efforts to gain an idea of when he or she envisions a return to normal operations.
Find out about business interruption insurance
Business interruption insurance compensates a business for the losses resulting from covered events, which typically include natural disasters. Some insurers pride themselves on the efficiency of their claims process, while others take months to review and process a claim.
Find out whether the company carries business interruption insurance and if they’ve submitted a claim. Ask the company to provide an estimate of when payment is expected. If possible, with the company’s permission, review the claim documentation and talk directly to the insurance claims department to ensure the information provided by the company matches the status of the claim.
Look at previous performance
Ask the prospective borrower to discuss the challenges that faced the business before the natural disaster — and whether they know how to tackle those challenges today. Analyze the predisaster financial performance of the business and pay close attention to the sales, expense, and net profit trends.
If the business struggled prior to the natural disaster, there’s a good chance of continuing challenges on the horizon. Although this doesn’t necessarily mean the business is automatically a poor credit risk, it does mean the business may take longer to establish a strong operational footing. It may also struggle to fund debt payments — at least initially.
Help prospective borrowers wisely
Small businesses around the country routinely find themselves caught up in extreme weather events. Lending to businesses facing such hardship can help your institution play a critical role in helping the communities it serves recover quickly.
Lending a helping hand to small businesses
To compete with traditional and nontraditional lenders intent on providing loans to small businesses affected by natural disasters, it’s important for your institution to offer help when it’s needed the most. Here are some ways to support disaster relief efforts — and increase your bank’s standing in a crowded marketplace:
- Provide prepaid calling cards and set up cellphone charging stations in or near your branches.
- Support clothing and food drives by accepting donations at your branches or corporate offices.
- Deliver water to those impacted by the event, as well as first responders.
- Consider setting aside office space in your branch for small business owners to use.
- Allow employees to volunteer their time to support charities operating in the disaster zone, or match their charitable donations to qualified nonprofits.
- Distribute pamphlets listing critical numbers that victims might need, such as those of the Red Cross or the water or power companies in the area, or the addresses of local hardware stores.