When the Covid pandemic shut down his entertainment booking agency, Sleeping Giant Music, in 2020, Freddie Harb faced financial ruin. With concerts and live events largely on hold, the San Diego businessman said, he turned to the U.S. Small Business Administration in case he needed help making payroll. Like nearly 4 million other small-business owners, he received what’s called an “economic injury disaster loan.”
But when Harb repeatedly tried to repay the loan, records show, his payments were never taken by the agency. Three years later, he learned he was in default and his business was in collections.
“I wish I never got that loan,” Harb said in an interview. “It’s been a total nightmare.”
Navigating the SBA’s Covid disaster loan program has become similarly agonizing for several other small-business owners who, like Harb, say their loans were wrongly deemed delinquent or in default as a result of the agency’s own internal accounting and processing errors.
“It’s a complete s— show,” said Trevor Curran, who co-runs Aurora Consulting, a Connecticut-based firm that has helped dozens of small-business owners manage and obtain SBA loans. “Dysfunctional internal systems, incompetent processing, bad communications.”
Along with the added stress and wasted time trying to fix mistakes, several business owners accused of default have faced real financial consequences due to the agency’s alleged blunders, including garnished or withheld Social Security checks and tax refunds, intercepted Medicaid payments, and files sent to private collectors who’ve flagged delinquencies on credit reports, Curran said.
An official for the Treasury Department, the agency charged with collecting on defaulted loans for the federal government, did not answer questions about specific collection methods but said they are used as a last resort.
In an emailed statement, the SBA said it couldn’t comment on individual loans for privacy reasons. But a spokesperson said the agency made a number of improvements to its payment system last year. It had also undertaken “significant outreach to every borrower as their loan payments begin and as loans become delinquent,” the spokesperson said. To date, that has meant more than 115 million phone calls, over 16 million emails and nearly 1.7 million USPS letters, the statement added.
Some consultants say the alleged problems at the SBA — an agency with about 2,800 full-time employees — stem from the record surge in its workload after Congress expanded the disaster loan program in response to the Covid pandemic. The agency acknowledged the Covid disaster loan program “was an unprecedented program to stand up, scale, and administer during the pandemic.”
The economic injury disaster loan program traditionally helped businesses hurt by hurricanes, earthquakes and other localized disasters. From 1953, the year the SBA was created, to when the pandemic struck in 2020, the agency made a total of about 2.2 million loans worth $67 billion, according to the SBA. Then, in the two years after Covid struck, the agency approved 3.9 million loans totaling $378 billion, a spokesperson said.
The spike in new loans exposed several operational weaknesses, according to outside reviews. A 2021 Government Accountability Office report found the SBA’s communications often failed to provide key information to applicants. An October 2024 Inspector General’s report said the SBA “has not had effective IT management policies and procedures for several years.”
“Congress has never properly funded this agency,” said Curran, who said his consulting firm has assisted nearly 90 borrowers this year who’ve disputed that their loans were delinquent. “It’s behind at every level, including technology.” The agency’s spokesperson denied such problems are hampering loan processing, saying that the SBA’s technology systems “are functioning properly.”
As most Covid disaster loans have come due, following initial deferment periods, the agency has reported an unusually high default rate that business owners and consultants interviewed believe is inflated by mistakes.
As of this month, the SBA has referred almost 893,000 Covid disaster loans to Treasury for collections, with nearly all of them sent this year. Such referrals to the Treasury are required once a loan is 120 days past due, the agency said. The SBA has since recalled about 60,000 of those defaulted loans under an exemption, which canceled collection penalties and allowed the agency to keep servicing the loans for two years.
Still, some borrowers say they’ve since spent months trying to sort out loans they say were wrongly deemed delinquent.
For Harb, it’s taken more than three years. In February, he said, he received a notice from the Treasury Department that his loan was in collections and he now owed a 30% penalty plus thousands in additional interest. Harb hired Curran to get the loan out of collections and sent back to the SBA, but the agency still hasn’t retrieved the full payment that Harb had set up more than three years earlier, records show. In the meantime, additional interest keeps piling up.
In an Oct. 15 email, the SBA acknowledged Harb’s attempts at payment, and instructed him to contact his bank for more information. Harb said his bank told him the SBA has never made an electronic request to withdraw the funds. His bank records show the account had more than enough money for the payment.
“It shouldn’t be this hard to pay back a loan,” Harb said.
California resident Robert Mavaddat said he tried to be proactive about repaying a $500,000 disaster loan that helped keep his three Fantastic Sams hair salons afloat during the pandemic. In September 2022, with his payments set to begin, he inquired about getting a reduced monthly payment for hardship reasons. But after following instructions and making several payments by mail to an SBA office in Texas, he learned the Texas office had closed. Despite multiple calls, he said, the SBA couldn’t tell him which office had his loan or where to mail his payments.
Then, in December 2023, Mavaddat received what he described as an alarming letter from the SBA saying his loan was past due by more than $31,000, records show. When he called to dispute it, he said, an agent told him it had no record of past payments and that his loan had been sent to the Treasury for collections. While trying to resolve the matter, Mavaddat got more letters — from the Treasury and a private collections firm — that appeared to demand payments totaling nearly $1.5 million, records show.
Although Mavaddat took out only one loan, the letters indicated that he owed more than $734,000, including interest and penalties, on each of two salons. Mavaddat finally drove to a local SBA office, where a representative told him he should consider declaring bankruptcy, he said.
“It was like hell,” said Mavaddat, 66, who immigrated from Iran and has since spent decades building his salons into business successes. “I was scared that I was going to lose everything.”
As it turned out, the SBA had simply misfiled Mavaddat’s loan under his federal employee identification number rather than his Social Security number — a bookkeeping error discovered after months of frustration, and only after Mavaddat hired Curran, he said. The consultant helped get his loan moved back to the SBA, where he’s now caught up and making regular payments.
Exactly how many of the loans sent to collections this year resulted from errors isn’t known, consultants say. “It’s all anecdotal,” said Curran. “But the stories I’ve heard are mind-blowing.”
Jason Milleisen, a consultant who works with disaster loan borrowers, said some of his clients have also complained about mistakes and misinformation when dealing with the SBA.
Milleisen added that, in his experience, the SBA is unwilling to forgive disaster loans, unlike it does with loans for general financial assistance. “It seems like the people who are the least at fault for their situation due to a disaster should be given some consideration,” he said.
Alejandro Contreras, an SBA director overseeing disaster loan program policies, said in a YouTube interview earlier this year that the SBA doesn’t “have the authority to forgive disaster loans.”
“What we can do is try to be as flexible as possible to borrowers to give them some relief,” he said, noting that the agency has expanded its hardship accommodation program to reduce payments for some disaster loans. As of December, more than 430,000 borrowers are enrolled in the program.
But some business owners say they’ve also found the hardship program rife with problems.
Scott Kobryn, a Boone, North Carolina, resident whose business, SteakAger, manufactures equipment for dry-aging beef, said he’s made regular $2,505 monthly payments on his $500,000 Covid disaster loan.
But with his revenues continuing to flag last year, Kobryn asked for reduced loan payments. In April, the SBA approved his hardship request, dropping his payments to $251, records show. Kobryn said he made the new payments each month.
But in October, he noticed that his online account showed his loan several months past due. His and Curran’s efforts to resolve the issue have since gone nowhere, he said.
“If I’m dealing with my bank, these problems don’t exist,” Kobryn said. “Losing payments, banks don’t do that. I don’t know if it’s rank ineptitude, but it isn’t normal business.”
In the meantime, Kobryn is now dealing with fallout from another disaster. Hurricane Helene flooded his warehouse and damaged property, he said. Such losses typically would qualify his firm for a traditional economic injury disaster loan. But last month, the SBA announced it had exhausted all funding for the program amid increased demand.
The agency couldn’t definitively say this week when funding might be restored, saying only that it’s “working closely with Congress to secure the resources needed to restore funding to this program as quickly as possible.”
