There are a variety of relief programs available for restaurants that have suffered during the COVID-19 pandemic, including grants from the Restaurant Revitalization Fund and forgivable Paycheck Protection Program (PPP) loans.

Related Read: Paycheck Protection Program Gets a Refresh

If your restaurant business was unable to obtain this relief — or if your funding has run out — you may be looking for other sources of capital. One option to consider is an Economic Injury Disaster Loan (EIDL). These loans, which are administered by the Small Business Administration (SBA), offer generous loan amounts, low-interest rates and long repayment terms. But, they also have some disadvantages — including restrictions on how the funds may be used and what you can do with assets pledged as collateral — so it is important to weigh the pros and cons.

Related Read: $28.6 Billion Federal Restaurant Relief

EIDL background

The EIDL program was established nearly 70 years ago. It provides direct SBA loans of up to $2 million to small businesses in declared disaster areas that have suffered substantial economic injury (meaning they are unable to meet their obligations and pay their ordinary and necessary operating expenses). In the early days of the pandemic, the CARES Act created a targeted EIDL program for small businesses (generally, those with up to 500 employees) affected by COVID-19, effectively declaring the entire country to be a “disaster area.” Applications are being accepted through the end of 2021.

Initially, the COVID-19 EIDL program allowed eligible businesses to borrow up to $150,000 to fund up to six months of working capital needs. Recently, the SBA increased the maximum loan amount, effective April 6, 2021, allowing businesses to borrow up to $500,000 for up to 24 months of working capital needs. The SBA also hinted that it would increase it further to the $2 million statutory limit. If you applied for or received an EIDL before April 6, you may request additional funding up to the $500,000 limit.

Loan Terms

EIDLs offer 3.75% interest and a maximum term of 30 years. Personal guarantees are not required for loans up to $200,000, but loans over $25,000 require collateral. For loans made in 2021, payments are deferred for 18 months (during which interest accrues). You may use EIDL proceeds for a variety of operating expenses, including payroll, benefits, accounts payable, rent, utilities, supplies and debt payments. However, certain uses are prohibited, including bonuses and dividends, expansion of facilities, acquisition of fixed assets, repair or replacement of physical damage and refinancing of long-term debt.

Unlike PPP loans, EIDLs are not forgivable. And you cannot use EIDL proceeds to fund expenses that were previously paid with a PPP loan.

Weigh the Pros and Cons

An EIDL can be an attractive option for restaurants that are short on working capital. But before you apply for one of these loans, be sure to consider the disadvantages. For example, the SBA may require you to pledge all of your business’s assets as collateral, which can conflict with other lending arrangements and restrict your ability to sell, lease or transfer those assets without SBA approval. And the restrictions described above prevent you from using the funds for expansion, physical improvements or repairs.

For more information about EIDLs and other financial relief for restaurants, please contact Chris Georgiou at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group.