Struggling restaurants are scrambling to contain the fallout of a recent court ruling that halted a Small Business Administration (SBA) relief program, on the basis that the funding criteria was discriminatory.

The Restaurant Revitalization Fund (RRF), part of the American Rescue Plan passed in March, provided $28.5 billion for businesses impacted by the COVID health crisis. Congress created the fund to provide food and beverage providers with grants equal to their pandemic related revenue loss, capped at $10 million per business, and $5 million per location.

More than 362,000 businesses applied for $75 billion in aid, which was far more than could be satisfied with the initial funding. The SBA initially sought to dole out the money by prioritizing historically underserved groups such as women, people of color and veterans.

However, the agency was forced to stop processing grants after a three-judge panel late last month ruled in favor of a Tennessee restaurant owner, who argued his application was de-prioritized because he was white. The effort was spearheaded by a conservative legal group.

The agency disclosed the funding halt last Thursday in a court filing, saying that it would “only resume processing these applications once it completes processing for all previously filed non-priority applications, and only then if the RRF is not first exhausted.”

The fight comes as many small businesses are still grappling with challenges that include acute worker shortages that have defied a recovery that’s gathered momentum, and soaring costs slowly being passed along to consumers.

Sharokina Shams, a spokesperson for the California Restaurant Association, told Yahoo Finance in an interview that it was “deeply disappointing to learn that nearly 3,000 struggling restaurants who were expecting these funds will not receive that help.”

Meanwhile, the National Restaurant Association sent a letter to the SBA this week, urging the agency to find funding for applicants whose grant approvals were revoked by the agency last week.

“The acceptance letter they received from the SBA represented a commitment to provide not only federal funding, but also a needed bit of hope that they would survive to serve their community,” Sean Kennedy, the association’s executive vice president of public affairs, wrote in the letter.

“The announcement that their grants will be awarded to others has left them confused, frustrated, and afraid they will have to close their doors for good,” he said.

“We urge you to review all pandemic relief programs under your control for the prospect of any appropriate reprogramming of federal dollars to fulfill your prior commitments to them,” he added.

'A long way to go'

On Thursday morning, a bipartisan group of lawmakers introduced new legislation to refill the SBA’s revitalization fund with an additional $60 billion. The effort dovetailed with growing calls for Congress to help small businesses rebound from the pandemic.

"Refilling the Restaurant Revitalization Fund is the most important thing Congress can do to get their constituents back on their feet and help their communities thrive," Erika Polmar, executive director of the Independent Restaurant Coalition said in a statement.

Around the country, optimism is on the rise as restaurants welcome indoor diners again, and the mass vaccination effort has sharply curbed new COVID-19 hospitalizations and deaths.

However, many small businesses are still operating in the red and in need of a financial lifeline just to keep their heads above water.

Shanny Covey, the co-owner of the Blue Mango Restaurant group in San Luis Obispo, California, was fortunate enough to have gotten her SBA grant just ahead of the funding halt.

“I feel great. It’s like we can pay off some of these loans and not have that burden because with the loan payments it would be harder to have the business be sustainable,” Covey told Yahoo! Finance in an interview.

Covey and her business partner own four restaurants in the Central Coast of California. She had applied for the RRF back in early May for two of their small businesses. Yet she was worried that hundreds of thousands of restaurant owners like herself would be competing for federal assistance.

Yet even without additional funds, some restaurants say they might not make it even after the country fully reopens.

According to analysis from the National Restaurant Association, restaurants and food service businesses may have lost as much as $290 billion in sales due to the pandemic, and 90,000 restaurants have closed permanently or long term as of May.

Tom Sullivan, a vice president at the U.S. Chamber of Commerce, said this week that small businesses owners are growing more hopeful about a recovery, but Congress needed to consider its next policy steps carefully.

“We have got to convince lawmakers to resist the temptation to micromanage Main Street towards recovery,” he told Yahoo Finance in an interview this week.

“If we can do that, then we will see small businesses being able to hire, being able to scale up their business and recoup the losses that have occurred over the past 15, 16 months,” he said, warning that small biz has “a long way to go” before rebounding to pre-pandemic levels.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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