The financial ticking time bomb of COVID-19 small business loans
The financial ticking time bomb of COVID-19 small business loans


In a little-noticed move last month, the Small Business Administration sent millions of letters to small businesses that borrowed money under its COVID-19 loan program. The letters announced an additional six-month delay before businesses must begin repaying their COVID-19 economic disaster loans.

At first glance, this looks like a pure act of kindness on the part of the SBA. On closer inspection, however, two points are significant. First, this action postpones repayments until the fall. We don’t know what will be different in the fall compared to now. Businesses are free to operate without government restrictions related to COVID-19 today. Businesses that plan to stay open are operating today.

The main problems facing small businesses operating today are not cash flow problems, but a shortage of employees and rapidly rising inflationary costs. These problems will not go away in the fall. Neither will be cured by kicking the box for six months.

Second, and more important, is the timing of the letter. About 3.9 million businesses have borrowed more than $353 billion under this program. This postponement seems like an obvious effort to produce as little pain as possible ahead of November’s midterm elections.

The amount of borrowing under this program — some of which was forced on small businesses by the SBA itself — was enormous, and there is strong suspicion that much of that borrowing will never be repaid. Some small businesses that did not need the cash injection set aside these funds. For them, repayment should be easy. Most small businesses, however, have used up the loans and lack the funds to repay them, even under generous long-term payment plans.

What we will likely discover after the midterm elections is that many businesses will make minimal repayments or simply default on loans. The SBA – ie the American taxpayer – will be responsible for these loans.

A betting person would make a more reasonable guess. When the repayment date comes in the fall, there will be intense pressure to extend the repayment date again. These are the same pressures we see on the massive and even larger student loan program, where repayments have been systematically deferred, even in the face of earlier promises not to.

The Biden administration is currently seeking new funding related to COVID-19. It is by no means finished absorbing the losses of the loans that the federal government has already granted.

Over the past few decades, the federal government has implemented a series of very dishonest programs. Rather than spending money, and perhaps smaller sums, on grants, he structured many programs as loans. The subsidy programs would have an immediate impact on federal spending and on federal deficits. Lending programs, on the other hand, have no such implications. They allow the federal government to spend far more funds than it is allocated. For the federal government, that’s the best of both worlds — providing money with little or no fiscal impact until years later when refunds fail to materialize or are partially reversed.

Incidentally, this same process once characterized many of our foreign aid programs. In the 1970s, American and international lending agencies developed huge loan programs for poor countries that had no hope of repaying them, especially at the high inflationary interest rates of the time. President Ronald Reagan put an end to it in US bilateral aid programs. According to him, if aid is in the national interest of the United States, it must be given in the form of grants and accounted for honestly. Otherwise, it should not be done at all. It was a more honest way for Congress and the executive branch to spend taxpayers’ money.

• Jeff Bergner has served in the legislative and executive branches of the federal government.


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