🔒Looming COVID-19 emergency loan repayments a concern for still-struggling small businesses

A $150,000 loan from the U.S. Small Business Administration helped New Britain’s Crystal Ballroom survive months of a government-mandated shutdown during the COVID-19 quarantines.

Alina Wegrzyniak, owner of the family-run function hall and catering facility, said she is grateful but also worried about the end of a 30-month deferral period in October. She’s due to begin making payments at a time when unprecedented challenges have spilled out of the pandemic, including inflation, rising commodity prices and labor shortages.

“It is a lot of money,” Monika Wegrzyniak, Alina’s daughter, said. “We have energy bills. The gas and the food prices are killing us right now.”

The SBA’s Economic Injury Disaster Loan program allowed businesses to borrow up to $2 million at 3.75% interest for 30 years. As of April 27, the SBA logged 38,000 Connecticut loans under the program, amounting to more than $4 billion.

The ability to push off repayments will come to a close in October for the earliest EIDL borrowers, and while the program proved a critical lifeline for many companies like Wegrzyniak’s, there are concerns that the end of the 30-month deferral period — which was extended previously — could push many still-struggling businesses closer to the edge.

Amid those fears, some, including U.S. Sen. Richard Blumenthal (D-Conn.) are calling for even more forbearance.

“As Connecticut emerges from the debilitating losses caused by the pandemic, the Small Business Administration must consider extending the forbearance period to allow businesses more time to recover,” Blumenthal told the Hartford Business Journal. “I also urge the SBA to take all administrative steps available to provide additional assistance to the small businesses that need it.”

EIDL loans were issued to a wide range of businesses, from property managers to dentists. An adult novelty store in Hartford received a $150,000 loan. Much of the concern being raised about repayment is coming from the hard-hit service industry, including restaurants.

“There’s always a new challenge making it difficult for restaurants to get back on their feet,” said Scott Dolch, president of the Connecticut Restaurant Association.

Dolch pointed to National Restaurant Association data showing that, among restaurant operators continuing to use deferrals, only 23% anticipate being able to repay principal and interest on EIDL loans. A further 46% say they could pay principal, but not 30 months of accrued interest.

Dolch said he is working with federal officials to try and find a way to at least soften the repayment burden.

“Our strategy on EIDL is trying to work with the federal government to lower or eliminate the interest rate for a short time for those making payments on the principal,” Dolch said.

'House of cards'

The SBA’s Economic Injury Disaster loans were processed through the agency, not private lending institutions like the more well-publicized and forgivable Paycheck Protection Program loans. Even so, Bruce Adams, president and CEO of the Credit Union League of Connecticut, said lenders are hearing concerns about the pending end of EIDL deferrals from borrowers who anticipate trouble paying off other loans as a result.

“How big of a house of cards is going to fall if this expiration of the deferment period doesn’t get extended?” Adams asked.

William Moore, president of the Greater New Britain Chamber of Commerce, said an increasing number of his members are raising concerns about EIDL repayment.

The Greater New Britain Chamber itself depended on a $126,400 SBA loan during lean times while members struggled to pay dues and fundraising events were impossible. The chamber also widely broadcast the availability of the EIDL program, Moore said.

“We really cleared the decks to make sure we were informing everybody this was out there, but also letting them know it is a loan and loans have to be repaid,” Moore said.

Moore said he is advising members concerned about EIDL repayment to reach out to the federal delegation.

Karen Blacik, a principal with accounting and advisory firm CliftonLarsonAllen LLP, said she is counseling restaurant clients to “look under all the couch cushions” for ways to stock up capital for coming challenges. That might mean running with a leaner staff, carrying less inventory or renegotiating leases, she said.

“I really highly doubt the SBA will extend out the deferral any longer, especially since they already extended the deferral in March for another six months,” Blacik said, noting the failed effort in Congress to replenish the $26.8 billion Restaurant Revitalization Fund.

U.S. Rep. John Larson (D-1st District) in a statement said his office is working with small businesses “stuck in the EIDL and Restaurant Revitalization Fund” queue. More than 100,000 restaurants across the country missed out on assistance, Larson wrote.

The congressman supported a failed attempt earlier this year to recharge the Restaurant Revitalization Fund with $42 billion.

A useful lifeline

Allan Nguyen, owner of Lily’s Nails of New Britain, said a $150,000 SBA loan saved his five-year-old business. It is still recovering, but Nguyen has already begun repaying his debt.

“After you were closed for three months, you’re back on rent, back on a lot of stuff,” Nguyen said. “Without that, I didn’t think I could hold through.”

Michael Lassy, co-owner of Mastercraft Tool & Machine Co. in Southington, said a $150,000 EIDL loan allowed him to keep his 54-year-old tool and die shop’s 21 employees working even after customers pulled back parts orders due to labor shortages and other challenges.

Lassy said he used the time to build up inventory, which is now beginning to thin out to normal levels. Lassy wanted to keep his staff employed for their sake and his own. Replacing trained manufacturing help is extraordinarily difficult. It was better to hold onto staff rather than hope they would return following layoffs.

Lassy started paying down his loan about a year ago, he said.

Some borrowers just held onto the money for a rainy day, but never spent it.

James Galvin, owner of Rizzo Pools in Newington, said he took a $140,000 EIDL loan “just in case,” but hasn’t needed to tap the money and will simply return it.

Rozalynd Koba said she borrowed $9,000 for her Durham massage therapy business at a very uncertain time. Her husband, a chef, had been out of work for about eight months. Her business was temporarily closed. Their child was eight months old.

“I took it out, but it was advised to me by my bank to keep it in the account as an insurance policy,” Koba said. “I just held onto it and paid mine back in full last month.”

Attractive offer, but clearly a loan

Catherine Marx, director of the Connecticut District Office of the SBA, said the low rate and long repayment period made the EIDL loan an attractive tool. Rates of 3.75% for business loans and 2.75% for nonprofits are “unheard of,” Marx said.

“Every single day I could give you a number of different businesses I know that without COVID working capital would not be in business,” Marx said.

Marx said the SBA made it clear from the start that Economic Injury Disaster loans would have to be repaid. Even so, the agency is working to reinforce the message.

“We are doing outreach to work with businesses, so they understand that they are coming due and they are going to need to go in and start paying them,” Marx said.

EIDL – like some other COVID-19 relief programs – has been the target of wide-ranging concerns of fraud and poor vetting of applications in the rush to distribute money during the crisis.

In May 2021, U.S. Attorney General Merrick B. Garland established the COVID-19 Fraud Enforcement Task Force to coordinate efforts to uncover pandemic-related fraud.

In remarks during a COVID-19 fraud roundtable in Washington, D.C., Garland said the Justice Department had seized more than $1.2 billion in relief funds since the start of the pandemic and charged more than 1,000 people with crimes.

Concern muted for now

While concerns about loan repayment may be rising in some corners, it hasn’t led to a clamor just yet. Leaders from several business groups, including the Waterbury Regional Chamber and Connecticut Business & Industry Association, said they haven’t yet heard EIDL complaints from their members.

Bill Slattery, a partner with accounting and financial consulting firm Fiondella, Milone & LaSaracina LLP, said about 50 or more of his clients took advantage of the emergency loans. None have yet returned with worries about repayment.

Given the other challenges facing businesses and the SBA loans’ relatively generous terms, this new expense might not be high on the list of burdens, Slattery said.

“My honest opinion is if you hear an uproar, you will hear it a few months in,” Slattery said. “I honestly think it’s going to catch people by surprise. I think that’s coming down the road for sure. I don’t know if it’s going to be an uproar, but certainly it’s going to be an issue.”