EIDL defaults above 30%, independent restaurants among most affected sectors

Borrowers face Treasury collection as SBA hardship program expires

Since Congress passed the Coronavirus Aid, Relief, and Economic Security (Cares) Act in March 2020, the federal government has issued 3.9 million Covid-related Economic Injury Disaster Loans (EIDLs) totaling $378.4 billion, administered by the Small Business Administration (SBA), with up to $2 million available per applicant. A congressional report released earlier this year found that defaults have steadily risen above 30%, resulting in $75.2 billion in charged-off loans as of last June. The restaurant industry has been among the sectors most affected, and as the loans age past the deferment period, a growing share of borrowers are being transferred to the US Treasury Department for collection.

“Covid was an extinction event for tens of thousands of restaurants,” said Erika Polmar, executive director of the Independent Restaurant Coalition, a non-profit advocacy group for independent bars and restaurants in the US. “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,” Polmar said.

For almost 20 years, Jai Mazumdar has served vegetarian curries, samosas, gulab jamun and other Indian delicacies at Spice N Curry, a cafe and grocery nestled inside a modest strip mall near Florida International University (FIU) in Miami. When the pandemic devastated his business, as it did with so many restaurants, Mazumdar took out a $370,000 EIDL from the federal government in early 2021. He said he was confident that once business returned to normal he could begin repaying the 30-year loan, which came with a 3.75% interest rate and a 30-month deferment period.

But Spice N Curry relied heavily on foot traffic from FIU, and many students and faculty continued studying and working remotely both during and after the pandemic, Mazumdar said. As losses mounted, he applied for additional EIDL funds and received another $87,000 loan the following year. Initially, he used the EIDL money to refurbish the space and upgrade equipment, installing new refrigeration and freezer units to increase his retail inventory; he used the rest to cover operating expenses. After finally reopening the cafe in 2022, sales declined so badly that he decided to close the dining room permanently after just a year and a half. Five years after he took the original loan, Mazumdar said, the EIDL money is gone, and he no longer believes he will be able to repay the loans in full.

Mazumdar said his business is worse off today than it was during Covid, a sentiment echoed by other operators whose businesses have been negatively affected by 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.” His monthly EIDL payment of $1,900 now exceeds his $1,600 home mortgage, and he has rented out a room in his own home to help cover the difference. “I’ve been working seven days a week, 12 hours a day for the last three years. It’s become a completely hand-to-mouth existence,” he said.

Borrowers with EIDLs totaling more than $200,000 were required to personally guarantee the loan, meaning that if they default, the government can seize their personal assets. Once a borrower exceeds 120 days past due on EIDL payments, the loan is transferred to the Treasury for collection, with additional fees and penalties that typically amount to about 30% of the principal. For personally guaranteed loans, the IRS can garnish delinquent borrowers’ wages, tax refunds or a percentage of their Social Security benefits.

Randy Barnette, founder of the Virginia-based Ornery Beer Company, took out a $500,000 EIDL in February 2021 and is now almost two years past due. Before Covid, he had been searching for a space to open a second location of the Ornery Beer Company Public House, the restaurant and bar that features Ornery brand beers. The EIDL funds presented an opportunity to stabilize the business and facilitate expansion; at the time, no bank or individual investor could provide a six-figure loan at such a low interest rate, and he was not dissuaded by the need to sign a personal guarantee. “I literally got an email from the SBA on a Monday, and a couple of signatures on DocuSign later, there was a half million dollars in our account in 48 hours,” Barnette said. “It was so easy, I was afraid I was falling for a scam.”

After several costly real estate deals fell through, Barnette eventually opened a second restaurant, which is still operating, but declining sales forced him to downsize the production brewery and shutter the original restaurant. To provide relief, the SBA instituted a hardship accommodation plan in November 2022 that allowed businesses to reduce their monthly payments after the deferment period ended; that program expired last March. “Once the hardship program ended, we stopped making payments altogether,” Barnette said. “Because we can’t. We’ve been struggling.”

Barnette’s loan was transferred to the Treasury for collection last summer. With compounded interest, penalties and fees, his total bill jumped from $530,000 to more than $750,000. “Maybe the smartest thing to do would’ve been to close down two years ago,” he said. “Not one nickel that we paid after the grace period went to the principal.” Bankruptcy law in Virginia, where 56-year-old Barnette lives, has limited protections for homeowners: if he files for chapter 7 protection, the EIDL loan could be discharged, but the government could place a lien on his personal property, and the state’s homestead exemption protects only $25,000 of home equity per individual from seizure. “My home that I’ve lived in for 20 years is the only thing I have of value,” Barnette said. “I don’t have any life savings. I don’t have retirement funds. I’ve dumped everything into this business to make it keep working through the years. If I lose my house, I’ll just be living in a trailer park until I die.” Florida residents are protected from losing their primary home in bankruptcy, and Mazumdar said he intends to continue paying his monthly installments on time even while his business operates in the red.

Other operators echo the same pressures. Dan Jacobs, chef and co-owner of DanDan and EsterEv in Milwaukee, said his business pays close to $5,000 a month to service the loan he took out in 2021, which he said cuts his profit margin by one-third. “For what we’re paying per month, if you break it out over a year, it’s the cost of a high-level manager in our company,” Jacobs said. “Meanwhile, we’ve seen close to a 15% drop in business from last year. And there’s no real reason for it, except the fact that the economy is trash,” he said.

As the number of EIDL delinquencies rises among independent restaurant owners, some observers blame the SBA for relaxing the standards for creditworthiness too much post-Covid and approving loans to small businesses that were beyond their means to repay. John Benson, a small business attorney in Doylestown, Pennsylvania, said his firm has seen a significant uptick in inquiries from restaurants struggling to manage 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,” Benson said, describing operators who took on the loans despite uncertainty about repayment. He said many of his clients could not have anticipated the inflation, tariffs and immigration-driven labor changes that followed. “These owners could not possibly have imagined inflation the way it is, tariffs coming into play or immigration affecting their labor force,” Benson said. “The vast majority of them did the very best they could. They put the money into things that they thought would help the business.” Benson said his firm has had success working with the Treasury to reinstate loans that had entered collection or to settle clients’ debts for lesser amounts.

The SBA has separately pursued Covid-related EIDL and Paycheck Protection Program fraud cases through an effort called Operation No Doze. With midterm elections approaching, Barnette said he is “kicking the can down the road” while waiting to see whether Congress or the next administration addresses outstanding EIDL debt. “We’re all holding our breath in the restaurant industry, hoping the political climate changes and maybe our leaders will do something about this,” Barnette said.