Many small businesses that received federal pandemic aid are now on the hook for repayments, and some say the timing couldn't be worse.
WrightIMC, based in Allen, Texas, borrowed $150,000 from the Small Business Administration's Covid-disaster loan program two years ago. The 20-person digital marketing agency made its first $1,600 loan payment this month, just as ad sales are softening.
The disaster loan "has certainly helped us to survive and avoid layoffs," said owner Tony Wright, who has frozen hiring and is cutting expenses as customers tighten their belts. "Ironically the payback is coming at a time when we are seeing a steeper decline in business than during the pandemic," he said. "Maybe this isn't the best time to have everyone start paying back."
The SBA issued roughly $390 billion in Covid disaster loans to nearly four million small businesses and nonprofits. Unlike forgivable loans issued through the federal Paycheck Protection Program, the disaster loans were designed to be repaid.
Now after several deferrals, the bills are coming due. For 1.2 million Covid disaster loans, the first payments are due this month; another one million loans enter repayment in January. Borrowers began repaying 427,000 loans in October or November.
The loans, which carry a 30-year term and a fixed interest rate of 3.75% for small businesses and 2.75% for nonprofits, were welcomed by entrepreneurs who often struggle to obtain low-cost financing even when the economy is booming.
"It's cheap money," said Courtney Cowan, owner of Milk Jar Cookies in Los Angeles. "It's such a difference from everything else that's been out there, with a high interest rate and a two-year payback."
Ms. Cowan, who has 24 employees, used her roughly $1 million loan to cover operating expenses, the costs for a second cookie shop, scheduled to open in January, the services of a franchise consultant, upgraded packaging and a new website.
But inflation, supply-chain challenges and a tight labor market have made repayments more daunting than expected, she said. "I had a little bit of a sticker shock," said Ms. Cowan, who made her first $5,215 loan payment in November. "I know I have got to pay it back," she said. "I certainly thought I would be in a different position today." Business has been improving, she said, but still hasn't returned to prepandemic levels.
Inflation has clouded Nancy Clark's plans to quickly repay the $52,400 loan taken out by Trails End Ice Cream, which operates three ice cream shops and a concession trailer in North Conway, N.H. "We got annihilated with supply-chain issues," said Ms. Clark, who so far has made a single $100 payment. "They caused these crazy price increases."
Ms. Clark, who has 37 employees, must begin paying $256 a month on the loan in July 2023. Leery of taking on additional debt, she has put plans to expand the business on hold until the loan is repaid.
Some entrepreneurs said business never returned to levels they anticipated when they took out the loans.
Justin Tjelmeland used a $42,000 Covid disaster loan to pay rent and other bills for the Overland Park, Kan., martial-arts studio he ran for 21 years. But customers were slow to return to in-person classes. Mr. Tjelmeland shut down the studio last year. He now teaches martial arts at a different studioa few days a week and works two other jobs to make ends meet.
"I wanted to keep it open thinking the pandemic would pass over," said Mr. Tjelmeland, who isn't sure how he will come up with the $205-a-month loan payments that begin this month. "My credit has gone really down and I can't apply for a loan to start a new business," he said.
Tamara Segell, owner of the Bungalow Spa in Santa Monica, Calif., must also begin repaying her $35,000 Covid disaster loan this month. Demand for facials remains at about half of prepandemic levels, limiting her cash flow, she said.
Ms. Segell has no employees and used the money to cover rent and other expenses. She made her first payment on Tuesday.
The SBA initially allowed borrowers to defer loan payments for up to 12 months, then extended the deferral period twice, to a maximum of 30 months, to give borrowers more time to recover from the pandemic. It decided not to allow deferrals for the maximum four years allowed by Congress.
The SBA said in a statement thatit took feedback from borrowers across industries and that its decisions during the pandemic have been comparable to those made by Congress and bank regulators.
Borrowers experiencing short-term financial challenges can request a temporary hardship payment reduction, the SBA said. The option, available to borrowers with federal disaster loans, requires monthly payments of at least 10% of the amount due, or a minimum of $25, for six months. If the hardship continues, borrowers can request a six-month extension.
One-third of borrowers with Covid disaster loans made payments during the deferral period, the SBA said.
Some borrowers say they welcomed the additional time to recover but were surprised to discover that interest accrued--and their loan balance grew--during the deferral period.
"They did say it was a low-interest loan," said Kristin Malara, a provider of at-home child-care services in Lenexa, Kan., who took out a $14,000 Covid disaster loan. "They didn't say that it would start immediately accruing interest."
Ms. Malara said the loan provided a nice cushion for daycare providers but she now has second thoughts.
The SBA said it doesn't have the authority to eliminate accrued interest during the deferral period, but continues to look at options to assist borrowers. Repayment and interest details were stated during the application process and included in the loan authorization and agreement, the SBA said. The decision to charge interest during the deferral period was made by the Trump administration, the SBA said.
Gina Baski, owner of TriFit, a health club in Santa Monica, Calif., said she didn't realize interest was accruing on her $150,000 Covid disaster loan until she made her first loan payment this past March. Just $11,000 of the $35,000 in loan payments has gone to principal, according to Ms. Baski, who said business remains at half prepandemic levels.
Ms. Baski said she reviewed her loan documents before signing them, but was juggling changing health department regulations, financial challenges and the details of the Paycheck Protection Program at that time. "You heard the word defer. You made this assumption," said Ms. Baski, who now has 25 employees, down from 50 before the pandemic. Interest "was accumulating from the day we took out the loan, which a lot of us were unaware of."
