Small Businesses Struggle to Repay $378 Billion in Covid Rescue Loans

$378 Billion in Covid-Era SBA Loans Now Haunt 1-in-4 Small Businesses

• The Small Business Administration lent $378 billion through pandemic rescue programs.
• Repayment rates are falling as inflation, labor shortages, and higher interest rates squeeze borrowers.
• Agency data show roughly 25% of disaster-loan recipients are currently delinquent.
• The SBA is preparing its first-ever large-scale sale of defaulted Covid loans to private debt collectors.

Mounting defaults threaten both Main Street balance sheets and the federal credit portfolio.

SBA LOANS—When Congress flooded the Small Business Administration with Covid-19 rescue money in 2020, the goal was simple: keep America’s 30 million small firms alive through lockdowns. The agency ultimately pushed $378 billion out the door—an amount larger than the annual GDP of Denmark—through a mix of forgivable Paycheck Protection Program cash and traditional Economic Injury Disaster Loans (EIDL).

Three years later the rescue is turning into a reckoning. Loan statements that once carried 24-month deferrals are now due, and a volatile mix of 7% interest rates, persistent inflation, and softer consumer spending has left thousands of restaurants, gyms, and subcontractors unable to keep up. Internal SBA spreadsheets reviewed by congressional staff show that one in four Covid-era disaster borrowers is currently behind on payments, a delinquency rate nearly triple the agency’s pre-pandemic baseline.

The result is an unprecedented test of the federal government’s role as Main Street’s largest lender. Under pressure to shrink its exposure, the SBA is quietly preparing to bundle and auction defaulted notes—something it has never attempted at this scale—while simultaneously expanding its transfer of overdue accounts to Treasury’s Bureau of the Fiscal Service for aggressive collection, including tax-refund intercepts and Social Security offsets.

From Lifeline to Balloon: How $378 Billion in Covid Relief Became a Debt Burden

The $378 billion figure represents the combined face value of two flagship programs: the Paycheck Protection Program, which sent banks $800 billion in forgivable loans later forgiven en masse, and the lesser-known Economic Injury Disaster Loan program that offered 30-year notes at 3.75% interest with no forgiveness clause. While PPP dominated headlines, EIDL quietly became the largest direct-loan portfolio in federal history, swelling from $56 billion pre-Covid to $258 billion by mid-2021.

Unlike PPP, EIDL funds function as traditional debt. Borrowers received lump sums—often $150,000 to $500,000—based on revenue losses calculated by the SBA’s disaster models. Deferrals lasted only 24 months; principal and interest began amortizing in 2022 just as the Federal Reserve started its most aggressive rate-hike cycle since the 1980s. The timing was brutal: a restaurant owner who locked in a $400,000 EIDL in July 2020 began repaying $2,100 a month in July 2022, the same month food-away-from-home inflation peaked at 8.5%.

Delinquencies followed the macro shock. In January 2023 the SBA reported a 17.8% serious delinquency rate on Covid EIDL; by March 2024 that share had climbed to 24.9%, according to data the agency shared with the Senate Committee on Small Business. The portfolio’s weighted-average credit score has fallen 42 points since origination, a slide analysts at Beacon Policy Advisors say is unprecedented for a federally backed loan book within its first three years of repayment.

Why the SBA’s own risk models underestimated post-pandemic default risk

Internal Government Accountability Office reviews found the SBA relaxed nearly every safeguard used in prior disasters: it waived personal guarantees on loans under $200,000, accepted borrower-submitted tax transcripts instead of IRS verification, and allowed applicants to self-certify revenue. Karen Mills, who ran the agency during the Obama administration, told researchers the approach was understandable in March 2020 but left taxpayers exposed. “Speed trumped controls,” Mills said. “When the fire is at the door you open the hydrant, but you still need sprinklers.”

Sprinklers never arrived. The SBA’s Office of Credit Risk Management requested additional staffing in 2021; the OMB never approved the hiring plan. Today the same 450 loan officers who originated Covid EIDL now manage workouts on a portfolio 4.5 times larger, a workload that industry experts compare to “a community bank trying to service JPMorgan’s book with 1950s technology,” said Ami Kassar, CEO of advisory firm MultiFunding.

The consequence is a feedback loop: limited servicing capacity delays restructuring offers, borrowers fall further behind, and the agency’s only quick outlet—selling the debt at a steep discount—crystallizes losses for taxpayers while potentially exposing borrowers to more aggressive private collectors. The Office of Management and Budget projects a lifetime default rate of 43% for Covid EIDL, a level that would swamp the program’s 3.75% interest spread and leave a net cost to taxpayers of roughly $64 billion.

Inside the SBA’s First Mega Loan Sale: What Borrowers Can Expect

Faced with mounting delinquencies, SBA Administrator Isabel Guzman notified Congress that the agency will conduct its first large-scale sale of Covid EIDL notes in 2024, a move that transfers the right to collect payments from the federal government to private investors. The transaction, modeled on the FDIC’s failed-bank loan sales, will bundle thousands of defaulted notes into a single securitization marketed to hedge funds and specialty collection firms.

Borrowers whose loans are sold will receive a legally required notice giving them 30 days to request a hardship review; after that the new owner can demand immediate payment in full, report the delinquency to credit bureaus, and pursue litigation in state court. Because EIDL notes are backed by a personal guarantee, collectors can place liens on real estate, garnish wages where permitted, and levy bank accounts.

The scale is eye-opening. A term sheet circulating among potential bidders lists a $4.3 billion face-value pool carrying an average loan balance of $178,000; the SBA expects bids between 55 and 70 cents on the dollar depending on collateral quality. If the auction clears near the midpoint, taxpayers would absorb an immediate $1.5 billion loss while investors gain upside from any recoveries above their purchase price.

How private buyers price defaulted government debt

Debt buyers typically underwrite collections using a “liquidation curve” that projects cash flow over 48 months. For government disaster loans, the curve is unusually steep because collateral often consists of intangible business assets rather than real property. Jason Kuttich, a portfolio manager at Angelo Gordon, told trade publication Debtwire that bidders are modeling 18% net present value returns under the assumption they can recover 32% of outstanding principal within three years. That pencils in aggressive tactics: mass credit-reporting, accelerated litigation, and lump-sum settlement offers discounted 20% to 30%.

Consumer advocates warn the transfer could compound stress on still-fragile firms. “These businesses survived a pandemic only to face financial strip-mining,” said Ashley Harrington at the Center for Responsible Lending. Her group is pressing the SBA to require new noteholders to offer income-based workout plans similar to federal student-loan programs, but so far the agency has resisted, citing statutory limits in the Small Business Act.

One compromise under discussion would embed a borrower-protection fund financed by a 2% haircut on sale proceeds. The fund would pay collectors an incentive for every sustainable modification completed, a model piloted by the FHA in 2012 that cut re-default rates by half. Whether such safeguards make it into the final sale agreement will depend on negotiations between the SBA, OMB, and congressional appropriators who must sign off on any loss-realizing transaction.

Which States Face the Heaviest Pain?

Geographic patterns in the delinquency data show tourism-reliant and urban-service economies are most exposed. Nevada, Hawaii, New Jersey, New York, and California top the list of per-capita Covid EIDL defaults, according to an analysis of more than 11 million loan records obtained through FOIA by theTech Transparency Project. In Clark County, Nevada—home to Las Vegas—21% of all EIDL borrowers are 90 days or more past due, nearly double the national average.

The concentration matters because many of those states also imposed prolonged indoor-dining and entertainment restrictions, making revenue recovery slower. A hair salon in Honolulu that borrowed $210,000 in July 2020 saw 2021 revenue fall 58% below its 2019 baseline because Hawaii required a 14-day quarantine for out-of-state visitors through late 2020. Even after tourism rebounded in 2023, inflation-adjusted receipts remained 12% lower, leaving the owner unable to cover the $1,350 monthly SBA payment.

Rural counties reliant on energy and agriculture show the opposite trend. The Bakken region of North Dakota benefited from a commodity-price surge in 2022, pushing EIDL delinquency there down to 8.4%, the lowest in the nation. The divergence suggests that portfolio buyers will apply steep geographic discounts when bidding on pools heavy with coastal metro loans.

Sector breakdown: restaurants, gyms, personal services lead defaults

NAICS code-level data reveal that full-service restaurants (722511) account for 11.3% of all Covid EIDL dollars but 18.7% of defaults. Fitness centers, nail salons, and child-care centers follow similar patterns. The common thread is high fixed rents and labor intensity. “Once the deferral ended these businesses needed revenue to jump 20% just to stay even; most managed high single digits,” said Tom Sullivan, vice president at the National Federation of Independent Business.

Women- and minority-owned firms are disproportionately represented among delinquent borrowers, reflecting both a higher propensity to seek EIDL and historically thinner capital reserves. The Federal Reserve’s 2023 Small Business Credit Survey found 54% of Black-owned employer firms carried debt-service ratios above 1.5, compared with 32% of white-owned firms, amplifying default risk when cash flow wobbles.

What Are the Long-Term Consequences for Borrowers—and Taxpayers?

Defaulting on a federal disaster loan carries stiffer penalties than a typical bank charge-off. The SBA can refer accounts to Treasury’s cross-servicing program, which intercepts 15% of Social Security retirement or disability payments and up to 100% of tax refunds until the debt is satisfied. A borrower who owes $120,000 and retires could see $460 withheld monthly, pushing many below the poverty line.

Credit-reporting rules add another layer. The SBA traditionally reports delinquencies after 60 days; once transferred, private collectors can accelerate reporting to all three bureaus, dropping scores 100-plus points overnight. That can trigger universal default clauses on business credit cards and supplier trade lines, choking the very working capital firms need to rebound.

For taxpayers, the portfolio’s deterioration threatens the long-standing notion that disaster lending is self-financing. Prior to Covid, the SBA’s disaster program ran a slight surplus because interest income on older loans offset modest losses. The Covid vintage reversed that: OMB now estimates the lifetime cost at 17% of face value, meaning every billion dollars lent will require a $170 million appropriation down the road.

Could Congress intervene?

Lawmakers have floated several fixes. A bipartisan bill sponsored by Sen. Ben Cardin (D-MD) and Sen. Tim Scott (R-SC) would extend maturity on Covid EIDL from 30 to 40 years and cap interest at 1% above the 10-year Treasury, effectively cutting payments 28%. The Congressional Budget Office pegs the 10-year cost at $7.4 billion, a fraction of the $64 billion default estimate under current law.

Another proposal would create a voluntary mediation program modeled on mortgage foreclosure courts. Borrowers who document a 20% revenue decline since 2022 could force collectors into a six-month workout period, during which additional fees and litigation are stayed. Advocates say the program could cut ultimate defaults by a third, but House Republicans have resisted anything that looks like blanket forgiveness.

Absent congressional action, the path ahead is likely more sales, more collections, and more pain on Main Street. The SBA’s fiscal 2025 budget request already assumes a second $5 billion loan sale, and internal projections show the agency will need to offload roughly $18 billion of Covid paper before 2028 to stay within statutory lending caps. Each sale crystallizes losses, but it also frees capacity for new disaster lending when the next hurricane or wildfire strikes.

Is There a Way Out for Struggling Owners?

Despite gloomy headlines, options exist for borrowers who act early. The SBA’s Office of Disaster Recovery offers a Hardship Accommodation Plan that can reduce payments to 10% of the monthly amount for six months; interest continues to accrue, but the loan is coded as current on credit reports. Only 11% of eligible delinquent borrowers have applied, largely because outreach has been limited to form letters mailed 90 days after the first missed payment.

Refinancing is another avenue. Because EIDL notes carry a government guarantee, some community development financial institutions (CDFIs) will pay off the SBA at par and restructure the debt over a longer amortization. The catch is that CDFIs require updated tax returns and interim financials—paperwork many cash-strapped owners lack. Still, programs in New York and California have refinanced $310 million since 2022 with a re-default rate below 6%.

Finally, Chapter 13 bankruptcy can strip the personal guarantee if the business is closed, but Congress capped unsecured discharge at $465,275, meaning borrowers with larger loans must file Chapter 11—an expensive prospect for a shuttered firm. Attorneys recommend negotiating a stipulated judgment before the loan is sold; once a collector owns the note, settlement percentages typically fall from 70 cents to 40 cents on the dollar.

Key deadline: 30-day notice before sale

Borrowers who receive a “Notice of Intent to Transfer” have 30 days to request an administrative review. Requests trigger an internal SBA audit that can delay sale by 90 days, buying time to assemble refinancing or legal strategy. The window is fixed; missing it waives most procedural defenses. Attorneys say the single most important step is to open SBA mail promptly and respond in writing via certified mail.