For many businesses that struggled during the COVID-19 pandemic, Small Business Administration loans provided an essential lifeline. But now, thousands of businesses that accepted these loans have defaulted. And they owe a total of $59 billion in late fees, according to a recent report from the Wall Street Journal.
During the pandemic, the SBA loaned out a total of $390 billion in recovery loans from the COVID-19 disaster program. Now, 860,000 of those loans are delinquent and have been sent to collections.
When Congress originally approved the federal debt collection program, it authorized the Treasury Department to charge late fees to borrowers instead of funding the program. The SBA says that it’s standard for borrowers in default to cover those collection fees.
However, some small businesses say this fee structure wasn’t spelled out when they signed up to borrow funds.
Skincare company Ampac was one company who took out an SBA loan during this period. Of the $500,000 borrowed, they paid $425,000 before defaulting. Now that the loan is in collections, they still owe a total of $262,000.
When speaking with the WSJ, the company’s COO David Bade said of the 30 percent fee, “I can’t charge that as a business. You would go to jail for usury.”
There are many reasons why small businesses default on these loans. Some accidentally missed payments, while others still struggle financially or have gone out of business entirely.
While many argue the need for more transparency from lenders, especially those backed by federal disaster recovery programs, the idea of charging late fees is pretty standard across the industry. There are many legitimate reasons why businesses miss payments. However, it is important for entrepreneurs to do their research and understand the terms of any financing options before signing up. With more transparency from lenders and a better understanding from borrowers, these fees can have a much smaller impact on businesses and the economy as a whole.
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