For many small business owners, COVID-era Economic Injury Disaster Loans (EIDL) provided a financial lifeline during the pandemic. Now, years later, those loans are becoming a new source of stress as more borrowers fall behind on payments and face federal collections, additional penalties, and limited options for relief. I talked with Jane Veron, the CEO & Co-founder of The Acceleration Project (TAP), and Natalia Alarcon, TAP’s interim executive director, about what’s happening, what business owners should expect if they receive a collection notice, and the steps they should take before the situation becomes more serious.
How We Got Here
Rieva Lesonsky: More than a million EIDL loans are reportedly in default or collections. How did we get to this point?
Jane Veron and Natalia Alarcon: Over 3.9 million EIDL loans were approved during the pandemic. Interest never stopped accruing, even during the 30-month deferment period, so borrowers who made no voluntary payments saw their balances compound far beyond what they expected. Many also assumed their loans were forgivable, like the Paycheck Protection Program (PPP), when they were not.
The SBA’s Hardship Accommodation Plan, which had let struggling borrowers pay as little as 10% of their monthly payment, expired March 19, 2025, and in September 2025 the SBA began accelerating referrals of delinquent debt to the Treasury’s Cross-Servicing program. As of December 2024, the SBA had charged off more than 369,000 loans totaling over $47 billion, with another 96,745 loans (worth $14.7 billion) delinquent by 90+ days and in active collections.
The SBA is projecting a 37% default rate overall, meaning roughly one in three EIDL loans is either in collections or at risk of entering collections.
Lesonsky: Many business owners assumed the EIDL program offered more flexibility than traditional loans. What misconceptions are you seeing among borrowers?
Veron and Alarcon: Many small business owners confused EIDL loans with PPP loans. PPP was designed to be forgivable. EIDL is not. EIDL loans are 30-year government loans at 3.75% interest that must be repaid in full. This misunderstanding is one of the primary reasons so many borrowers are now caught off guard by collections activity.
There’s also confusion between the two separate EIDL programs. The COVID-19 EIDL and the traditional disaster EIDL have different rules. Borrowers should understand an important distinction about the COVID-19 EIDL. It was a one-time program that closed in 2022, carried a fixed 3.75% rate, and kept accruing interest throughout deferment, so many borrowers now owe more than their original loan amount. Traditional disaster EIDL works differently: it’s an ongoing SBA program tied to specific declared disasters, with payments that don’t start accruing interest until 12 months after disbursement
Additionally, many assumed there was a single standard path for resolving a struggling EIDL loan. In reality, options such as hardship plans, offer in compromise, and settlement vary a lot based on the borrower’s specific financial picture and loan status.
When Treasury Gets Involved
Lesonsky: What happens when an EIDL loan is transferred to the Treasury Department or the Department of Justice for collection? What should business owners expect?
Veron and Alarcon: Once a federal loan becomes delinquent, it may be referred to the Treasury Department’s Cross-Servicing program, which handles nontax federal debt. When the transfer happens, a penalty of up to 30% could be added to the outstanding balance. A borrower with $25,000 in principal could receive a demand letter for $32,500 or more, before accrued interest is even factored in.
The Cross-Servicing program can use demand letters, phone calls, payment agreements, credit bureau reporting, wage garnishment, private collection agencies, and dispute resolution processes. Once at Treasury, the government can offset federal payments owed to the borrower, including Social Security benefits, federal tax refunds, and federal contractor payments, without a court order.
In certain cases with larger balances, the DOJ can choose to pursue civil litigation, which can lead to a court judgment and a lien against real property. Once a loan is transferred to Treasury, it generally cannot go back to SBA, except in certain limited situations and on a case-by-case basis.
The SBA refers defaulted COVID EIDL loans to Treasury and, in cases when litigation may be required, or fraud is suspected, to the Department of Justice. As of April 2026, SBA had transferred 562,000 pandemic-era loans (COVID EIDL and PPP combined), worth $22.2 billion, to Treasury.
Your First Steps
Lesonsky: Borrowers can face a collection fee once their loans are referred to the Treasury. Why are so many entrepreneurs being caught off guard by that additional cost?
Veron and Alarcon: Because it’s added after the referral takes place. Borrowers have to wait for the demand letter from the Treasury, which can take up to three weeks to arrive, to see what, if any, kind of penalty they are facing. This is layered on top of interest that’s already been accruing silently since the loan was disbursed. For many borrowers, that number came as a shock, arriving before they’d had a chance to understand their options or seek guidance.
Lesonsky: If a business owner receives a collection notice, what are the first three steps they should take?
Veron and Alarcon: They should:
- Gather their original loan agreement, SBA portal payment history, bank records, and every letter from the SBA, Treasury, or a collection agency.
- Review the amount claimed, the deadlines, and who exactly is doing the collecting.
- Do not make a payment agreement under pressure. Seek trusted business, legal, or financial guidance first.
Lesonsky: At what point should a small business owner consult an attorney, accountant, or other financial advisor?
Veron and Alarcon: Small business owners should seek help from an attorney or advisor as soon as they receive a notice of default or first delinquency letter from SBA, ideally well before the 120-day mark, when the loan becomes eligible for referral to the Treasury Offset Program, and before 180 days, when it can move to Treasury’s Cross-Servicing.
Other points where it makes sense to seek outside help include:
- Before agreeing to any settlement, hardship plan, or Offer in Compromise
- If wage garnishment, a tax refund offset, a Social Security offset, or a lien notice actually arrives. These have specific legal timelines and appeal rights that are easy to miss without help.
- Before taking on new financing, restructuring the business, or making ownership changes while this debt is outstanding
Living With EIDL Debt
Lesonsky: How are these collection efforts affecting businesses that are otherwise healthy but still carrying debt from the pandemic years?
Veron and Alarcon: Some who understood the nature of the EIDL loans and thought they could cover debt service when the loan came due might now be experiencing margin pressure given tariffs, energy costs, labor shortages, etc. EIDL debt significantly affects a small business’s ability to secure new financing, too. That means a business can be profitable and current on its EIDL payments and still find itself boxed out of the capital it needs to grow because the debt shows up on the balance sheet every time a lender pulls financials.
Lesonsky: What lessons should small business owners take away from the EIDL experience when considering future financing?
Veron and Alarcon: The EIDL experience taught everyone that easy access to capital and the right amount and type of capital are very different things. Borrowing too little leaves growth opportunities on the table, but borrowing too much creates cash flow strain that can turn otherwise profitable businesses into financial casualties. A loan that felt manageable before interest compounded and deferment ended looked very different once repayment actually began.
Going forward, owners should read the full terms before signing any loans or other capital agreements. They should ask whether interest accrues during deferment and model what the balance will look like once payments start. Don’t assume; ask upfront what happens if you fall behind. They should also weigh new debt against everything already on the books. Capital that keeps a business alive in a crisis is invaluable, but it still has to be repaid on its own terms.
Once they have the loan, they should track the actual balance regularly and understand whether there are prepayment penalties. Always negotiate leverage and options early.
Small business owners should also [seek advice from] advisors, accountants, lawyers, or other outside experts when considering a certain type of future financing and reviewing binding financial and legal documents. Consultants, like those who work with TAP, can help owners strategize about what kind of financing is the best fit for them at that moment.
Looking Ahead
Lesonsky: There have been growing calls for additional federal relief or policy changes. What forms of assistance would have the greatest impact for struggling borrowers?
Veron and Alarcon: Clear, accessible information would make a huge difference. This includes plain-language guidance about borrowers’ rights, available options, and the true cost of entering federal collections, including what a penalty actually means.
Consistent, clear communication to small business owners before loans become delinquent would also make a big difference. A stream of communication alerting borrowers to what is coming in the months ahead would certainly help them prepare and strategize.
Additionally, early outreach and support are vital. Connecting delinquent borrowers with resources and advisors (via small business support organizations, CDFIs, and community lenders) before situations deteriorate can help them prepare for the repayment process.
Lesonsky: The EIDL program helped keep millions of businesses alive during the pandemic. Looking back, what lessons should policymakers learn from both the successes of the program and the challenges borrowers are facing today?
Veron and Alarcon: First, we should give credit for what the program did well. EIDL kept many businesses afloat during an unprecedented crisis and got money out fast.
But the same features that made these loans fast and accessible (deferment without a forgiveness pathway, minimal early communication about accruing interest) are now producing the collections wave. Policymakers should consider clearer, more transparent borrower communication and earlier, proactive outreach before delinquency turns into default.
They should also pair money with advice. Many small business owners didn’t have an accountant or advisor helping them understand the loan then, and don’t have one now to help them manage repayment. Funding real support and guidance, not just loans, would help close that gap.
Lesonsky: If a business owner calls you tomorrow and says, “I just got a letter from the Treasury — what do I do now?” Walk us through exactly what you’d tell them over the next 48 hours.
Veron and Alarcon: First hours: Don’t panic and don’t sign anything or agree to a payment plan on the spot. Slow down.
Day 1: Pull every document — original loan agreement, SBA portal payment history, bank statements, and all correspondence from the SBA, Treasury, or the collection agency. Confirm the amount claimed, the deadline, and exactly who is collecting the debt.
Day 2: Request debt validation in writing and flag any charges that look unclear. Reach out to a trusted advisor to talk through your options before you negotiate or commit to anything, and identify early whether this needs an attorney or tax professional with SBA/federal collections experience.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
Photo courtesy Karolina Grabowska for Unsplash+
