NEED TO KNOW

• Many borrowers are only now realizing their COVID era EIDL loans are not forgivable like PPP loans: the SBA is projecting a 37% default rate for the EIDL program 

• Borrowers are receiving collection letters with balances far higher than expected — the product of a mandatory 30% Treasury penalty added to outstanding balances, compounded by years of accrued interest.

• Defaulting into federal collections carries severe consequences, including significant credit score damage and wage garnishment.

• A trusted advisor can help small business owners understand what is happening, identify the right next steps, and move from confusion to a clear action plan. TAP offers small business consulting at no cost to support that process.

Why SBA EIDL Loan Collections Are Catching Small Business Owners Off Guard

The COVID-19 EIDL program closed to new applications years ago, but repayment is now an active and growing challenge for many small business owners. According to the SBA, EIDL loans included a 30-month deferment period.  What many borrowers did not realize is that while EIDL loans came with a 30-month payment deferment, interest never stopped accruing. For those who made no voluntary payments during that window, the compounding balance is resulting in amounts owed far higher than borrowers expected.

For business owners who were focused on survival during the pandemic, those repayment terms may not have felt immediate or fully understood at the time. Today, they are creating real financial pressure.

One major source of confusion is that many small business owners assumed their EIDL loans were forgivable, like PPP loans. They are not. EIDL loans are government debt that must be repaid, and that misunderstanding has contributed to a wave of delinquencies now moving into active collections.

The SBA's Hardship Accommodation Plan — a temporary payment reduction option that allowed struggling borrowers to pay as little as 10% of their monthly payment — expired on March 19, 2025. In September 2025, the SBA began to accelerate the pace of referring delinquent COVID EIDL debts to the Bureau of the Fiscal Service’s Cross-Servicing program. The Bureau in turn is partnering  with a handful of independent collection agencies to help collect outstanding debts.

The scale is significant. The Congress Research Report on Congress.gov cites that through the end of the first half of FY2024 (March 31, 2024), the SBA had charged-off $78.8 billion in SBA COVID EIDLs. 

Despite the scope of the problem, there has been limited press coverage, leaving many small business owners without adequate warning or preparation. For borrowers already operating on thin margins, these collection efforts can feel sudden, confusing, and deeply punitive.

What Happens When an SBA Loan Goes to Collections: Understanding Federal Debt Collection

Once a federal loan becomes delinquent, it may be referred to the Treasury Department's Cross-Servicing program, which handles nontax debt owed to federal agencies. According to the Bureau of the Fiscal Service, this program may use demand letters, phone calls, payment agreements, credit bureau reporting, wage garnishment, private collection agencies, offsets of federal and state payments, and dispute resolution processes.

Importantly, when a loan is transferred to the Treasury's Cross-Servicing program, collection fees of up to 30% may be added to the outstanding balance. This means a borrower with an outstanding balance of $25,000 in principal could receive a demand letter of $32,500 or more before accrued interest. Borrowers with EIDL loans greater than $25,000 should also understand that collateral may be part of their risk picture, as SBA rules required collateral for COVID-19 EIDL loans above that threshold, often secured through a lien on business assets. 

Adding to the challenge: significant staffing reductions at the SBA have made it more difficult to contact the department for greater assistance. TAP has received several anecdotal stories of calls and emails to the SBA going unanswered. That is a significant  amount of pressure for a business owner already managing customers, employees, vendors, and daily operations.

Defaulting into federal collections carries severe financial penalties. Beyond a drastic drop in your credit score, the government holds the authority to seize federal tax refunds, intercept federal payouts like VA benefits, and offset Social Security. Furthermore, W-2 employees risk having up to 15% of their disposable income automatically garnished.

This is where a trusted business advisor becomes essential.

How a Trusted Business Advisor Can Help You Respond to a Collections Notice

Small business owners are turning to TAP after receiving unexpected collection letters, only to find themselves hitting wall after wall as they try to get answers. Left without clear guidance or a reliable path forward, these business owners are frightened, frustrated, and desperate for someone to help them understand what is happening. 

TAP advisors have helped clients identify the documentation needed, including bank statements, original loan agreements, and payment history from the SBA portal. Advisors also help think through practical next steps, including how to request debt validation in writing, dispute unclear charges, and ask for documentation related to the debt. We help walk through options on negotiating with the debt collectors and determine when it is best to seek counsel: TAP’s role is advisory, not legal. When a situation involves complex legal, or collection-related issues, business owners should consider seeking guidance from an attorney or qualified professional with experience in SBA debt and federal collections before negotiating independently or making major decisions.

From Confusion to Clarity: What Small Business Owners Need When Debt Feels Overwhelming

Information is not the same as guidance. A business owner facing a collection letter may have access to general information, but that does not mean they understand what applies to their specific loan, deadline, cash flow, or long-term options.

That distinction is at the center of TAP’s model. TAP consultants provide relationship-based small business guidance, meeting entrepreneurs where they are, listening carefully, and helping them translate complex challenges into practical next steps.

TAP cannot resolve every debt situation directly. Some circumstances require specialized legal, tax, or financial expertise. But TAP can help business owners recognize when a situation needs immediate attention, separate what can wait from what cannot, and make a more informed decision about what to do next.

Sometimes that next step may be gathering documents, contacting a lender, requesting clarification, reviewing repayment options, or seeking professional advice. In more serious situations, it may mean exploring formal debt relief options, including bankruptcy, with a qualified professional.

The goal is not to give every business owner the same answer. The goal is to help each owner understand their situation clearly enough to make the next best decision for themselves, their business, and their future.

Frequently Asked Questions About SBA EIDL Loans and Small Business Debt

What should I do first if I receive an SBA EIDL collections notice?

Before responding, gather your original loan agreement, SBA portal payment history, bank records, and all letters from the SBA, Treasury, or any collection agency. Review the amount claimed, deadlines, and who is collecting the debt. Do not make a payment agreement under pressure without first seeking trusted business, legal, or financial guidance. 

What should I do if my EIDL loan is not in collections yet, but I am worried? 

Check your loan status in the MySBA Loan Portal at https://lending.sba.gov, including your current balance, payment history, due date, and any servicing notices. If you are behind or struggling, ask about available options before the loan becomes seriously delinquent. The earlier you act, the more options you may have.

Should I make payments during deferment if I can? 

Yes, if possible. Interest may continue to accrue during deferment, which can increase the total amount owed and potentially create a larger balloon payment later. Voluntary or partial payments may help reduce that long-term balance, but borrowers should keep clear proof of every payment. SBA information about managing COVID-19 EIDL loans is available here on their website. Borrowers can also contact SBA COVID-19 EIDL assistance at 833-853-5638 or CESC@sba.gov.

Why does the collection letter show a much higher amount than I expected?

When an EIDL loan is referred to Treasury's Cross-Servicing program, a 30% penalty fee is automatically added to the outstanding balance. This is a standard part of federal debt collection and is not an error. It is one of the most common sources of confusion for borrowers receiving collection letters. The collections agencies typically open with an amount that includes room for negotiation.

Is EIDL different from PPP? Can it be forgiven?

Yes, EIDL and PPP are fundamentally different programs. PPP loans were designed to be forgivable under certain conditions. EIDL loans are not forgivable 30 year loans at a 3.75% rate. They were  government loans that must be repaid in full. Many small business owners conflated the two programs, which is one of the primary reasons so many are now caught off guard by collections activity.

Can a business advisor help with SBA debt issues?

Yes. A trusted advisor can help you organize the facts, identify the right questions, understand what documentation you need, and determine when it is time to bring in a specialized attorney or tax professional. TAP can help create template letters borrowers can use to request debt validation and dispute unclear charges with collection agencies.

Where can small business owners get free consulting?

TAP provides no-cost business consulting to small business owners nationwide. TAP advisors help entrepreneurs navigate finance, operations, marketing, and growth, including complex challenges like small business debt guidance.

How do I apply for free small business consulting?

If you are a small business owner facing a difficult financial situation and need a trusted advisor in your corner, TAP is here to help. Our services are available nationwide at no cost. Since our founding, TAP has served more than 11,900 business owners and maintains a 95% client satisfaction rate.

Apply for free consulting → link here