Fed Study: Credit Key to Small Business Recovery after Disasters

Amid a record-setting wave of disaster losses in 2017 — including from Hurricanes Harvey, Irma and Maria, plus wildfires in the West — small businesses’ insurance gaps meant that credit availability was a key factor in their ability to recover, according to a report today from the Federal Reserve Banks of New York, Dallas, Richmond and San Francisco.

While business losses were fairly widespread in disaster areas, insurance holdings appeared to be mismatched to the actual damage that occurred. The uncovered losses created a need for credit financing. Disaster-affected firms applied for credit financing more than disaster relief, and most of them faced funding gaps, the report found.

Forty percent of small firms in FEMA-designated zip codes had natural disaster-related losses. For those firms, foregone revenues — not assets — were the largest source of losses, with 35 percent reporting losses of more than $25,000 in revenues. But only 17 percent had business disruption insurance. While 27 percent of affected firms applied for disaster relief, 48 percent applied for credit financing. Affected firms more often sought loans or lines of credit from non-traditional lenders, compared to unaffected firms.