Restaurants that survived the Covid-19 pandemic are now struggling under the weight of federal disaster loans, with defaults on Economic Injury Disaster Loans (EIDLs) rising to over 30%, according to a congressional report released earlier this year. The loans, issued by the Small Business Administration (SBA), have resulted in $75.2bn in charged-off loans as of last June.
Jai Mazumdar, owner of Spice N Curry, a cafe and grocery near Florida International University in Miami, took out a $370,000 EIDL in early 2021. The loan, with a 3.75% interest rate and a 30-month deferment period, was meant to bridge the pandemic crisis. However, his business never fully recovered, and he was extended an additional $87,000 loan the following year. Now, five years later, he is struggling to make monthly payments and fears he may never repay the debt.
Industry-wide impact
Since the Cares Act was passed in March 2020, the federal government has issued 3.9m Covid-related EIDLs totaling $378.4bn. Borrowers with loans over $200,000 were required to personally guarantee them, meaning the government can seize personal assets in case of default.
Erika Polmar, executive director of the Independent Restaurant Coalition, said: “Covid was an extinction event for tens of thousands of restaurants. The ones that survived, if they didn’t receive [restaurant revitalization fund] grants, had to pay off all that debt from small businesses loans or EIDLs. Local initiatives that promised rent relief or eviction moratoriums often fell through. So they moved through 2022 and beyond trying to pay off their debt and weren’t able to reinvest in their businesses.”
Struggling to stay afloat
Mazumdar says his business is worse off today than during Covid, citing rising food, labor and energy costs. “There is a tsunami going on right now,” he said. “Rents are very high. The average population doesn’t have spending power. There is a lack of qualified labor. Tourism has also declined here. Everyone is just nervous about when the next leg of the stool is going to collapse.”
He used the funds to refurbish his space and cover operating expenses, but sales declined so badly that he closed the dining room after a year and a half. His monthly EIDL payment is $1,900, and his home mortgage is $1,600. He has rented out a room in his home to cover part of the payment and works seven days a week, 12 hours a day, describing his existence as “hand-to-mouth.”
Collection and consequences
When borrowers exceed 120 days past due, loans are transferred to the US treasury department for collection, adding fees and penalties of about 30% of the principal. The IRS can garnish wages, tax refunds, or social security benefits for personally guaranteed loans.
Randy Barnette, founder of the Virginia-based Ornery Beer Company, is almost two years past due on a $500,000 EIDL. He used the funds to expand but faced setbacks, eventually closing his original restaurant. His loan was transferred to the treasury department last summer, and his total bill jumped from $530,000 to more than $750,000 with penalties and interest.
John Benson, a small business attorney in Doylestown, Pennsylvania, said his firm has seen an uptick in inquiries from restaurants struggling with EIDL debt. “When you’re drowning in the ocean and that lifeboat comes by, you don’t count to see if it has enough oars, you just hop in,” he said. He noted that owners could not have imagined inflation, tariffs, or immigration affecting their labor force, and added that his firm has had success working with the treasury department to reinstate loans or settle debts for lesser amounts.
Ongoing burden
Dan Jacobs, chef and co-owner of DanDan and EsterEv in Milwaukee, pays close to $5,000 a month to service his 2021 loan, which he says cuts his profit margin by one-third. He noted a 15% drop in business from last year, attributing it to the poor economy.
The SBA’s hardship accommodation plan, which allowed reduced payments after the deferment period, expired last March. Barnette said he stopped making payments after it ended. He fears losing his home, as Virginia’s homestead exemption protects only $25,000 of home equity. “If I lose my house, I’ll just be living in a trailer park until I die,” he said.
Mazumdar, protected by Florida’s bankruptcy laws, intends to continue paying his installments on time. Barnette hopes for political change, saying, “We’re all holding our breath in the restaurant industry, hoping the political climate changes and maybe our leaders will do something about this.”
