Federal COVID aid for small businesses has arrived quickly, but with risks for loan programs
Federal COVID aid for small businesses has arrived quickly, but with risks for loan programs

Many of the more than 30 million small businesses in the United States have experienced declining revenues or closure as a result of the pandemic. In response to these economic stresses, the Small Business Administration (SBA) quickly provided low-interest loans to small businesses impacted by COVID-19 through 2 loan programs. These loans helped businesses and employees, but were vulnerable to fraud and other losses.

In today’s WatchBlog article, we take a look at how these 2 loan programs work, their benefits, and the challenges the SBA faced in administering them.

Economic Disaster Loan Program

The Economic Disaster Loan Program (EIDL) provides grants and low-interest loans to help borrowers pay their operating expenses. Prior to the pandemic, EIDL had been used to support small businesses in communities affected by disasters such as hurricanes or wildfires. Between March 2020 and May 2021, the program provided approximately $230 billion in loans and grants to small businesses and nonprofits impacted by the COVID-19 pandemic.

EIDL approved for 1,000 small businesses by county, March 2020-February 2021

Paycheck Protection Program

The Paycheck Protection Program (PPP) was a new program designed specifically to respond to the pandemic by providing low-interest loans, from approved lenders, to small businesses that could be used for payroll and other eligible expenses, such as rent and utility payments. .

As of May 31, the SBA has guaranteed more than 11.8 million loans, worth about $800 billion. Small businesses that have received PPP loans can request that their loans be forgiven, meaning they do not need to repay them if they meet conditions, such as maintaining employee compensation levels and spending 60% or more of the loan in salary costs.

In general, small businesses with 500 or fewer employees were eligible for loans. In May, about 77% of loan forgiveness applications submitted to the SBA came from businesses with 1 to 10 employees, while 22% came from businesses with 11 to 100 employees. In contrast, less than 1% of loan forgiveness requests came from businesses with more than 500 employees.

What challenges has the SBA faced in administering the EIDL and PPP?

Lack of clear communication between the SBA and lenders or small businesses and vulnerabilities to fraud are among the challenges EIDL and PPP have faced.

Communication gaps. EIDL applicants said their biggest concerns were lack of information and uncertainty about the status of their application. Additionally, we found that until February, the SBA was not providing critical information to potential applicants, such as limits on loan amounts and definitions of certain program conditions. As a result, SBA’s customer service lines experienced spikes in calls and many small businesses filed multiple requests because they had not had a response to their initial request. SBA data showed that 5.3 million requests were duplicates.

To help address such challenges, we recommended in our July report that the SBA develop a comprehensive communications strategy that includes details on how and when it will communicate with the public about its emergency response programs. disaster.

Similarly, PPP lenders said the communication they received from the SBA was insufficient. Although the SBA has developed a web portal to communicate with lenders about the status of loan forgiveness applications, it has not developed a process to ensure that its responses to lenders are timely. This lack of information created confusion and uncertainty for lenders and borrowers and made it difficult for them to make management decisions. Accordingly, we recommended that the SBA develop and implement a process to ensure timely communication with lenders.

Fraud and other integrity issues. Another challenge these 2 loan programs faced was that because they were implemented quickly to meet demand, the programs became vulnerable to potential fraud and the risk of providing funding to ineligible applicants increased. For example, in January, we reported that the SBA had approved at least $156 million in EIDL loans to businesses potentially ineligible for the program. Therefore, we recommended that SBA perform data analytics on the entire EIDL portfolio to detect fraud and ineligible applications.

Similarly, the SBA quickly implemented PPP by allowing borrowers to self-certify their eligibility for financing and requiring limited lender review of borrower documents to determine eligible loan amount and eligibility for loan forgiveness. This made the program vulnerable to the risk of fraud. Accordingly, we recommended in June 2020 that the SBA do more to oversee PPPs. The SBA then developed procedures for a loan review process.

For both programs, we found that the SBA did not conduct formal fraud risk assessments. Accordingly, we recommended that the SBA respond to current and future risks and conduct a fraud risk assessment.

Want to know more about our recent reviews of EIDL and PPP? Check out our reports released in July (EIDL and PPP) and listen to our podcast with GAO’s small business program expert, Bill Shear.


  • Questions about the content of this article? Contact the WatchBlog team at blog@gao.gov

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