Government shutdowns, or the threat of them, have become a way of life in today’s political climate. The 16-day government shutdown of 2013 resulted in $24 billion in lost economic output and there’s seemingly no end in sight for the current one as each side battles over funding priorities.
In this article, the first in a two-part series on government shutdowns, we’re looking at how the fallout affects the small business community.
Here are five scenarios when government shutdowns can hurt small business.
1. When Your Customer is the Federal Government or a Contractor
The federal government is the largest single purchaser of goods and services in the world, awarding $500 billion in contracts every year. Everything from paper clips to missiles, computer software to marketing communication services, the government buys it all. And it’s not just from large contractors.
The Small Business Administration (SBA) works with federal agencies to award nearly one quarter of prime government contracting dollars to small businesses in accordance with statutory goals. These “set-asides”, as they’re known, generate millions of dollars in payments and support a broad ecosystem of prime and sub-contractors.
When the government closes, not only do federal contracts stop paying out, but the opportunity to bid for new business also dries up, since everyone (except critical government employees) is furloughed. Even during the brief January 2018 shutdown, contractors received “stop work” orders from agencies. This equates to tense times for small business and can cost employees and subcontractors their jobs, at least temporarily.
2. If You’re Looking for an SBA Loan
When the government shuts down, the SBA stops processing loan applications submitted by financial institutions on behalf of their clients (SBA doesn’t provide the funds, rather they guarantee the loan giving the lender a lifeline should the business owner default). In fact, it’s against the law for federal employees to do any work, even check email, when they’re furloughed.
If your small business is looking for cash to grow or expand, you won’t get an answer on whether the loan is approved until the government returns to work. The exception is SBA disaster loans that help small business and home-owners recover from declared disasters.
During the prolonged 2013 shutdown (16 days), 700 loan applications piled up in a queue while the agency was closed. The Washington Post cited several examples of small business owners left in limbo when the SBA held up their loans. For example, Chris Leh, president of TL Technologies in Lancaster, PA., told a congressional hearing that he had to cancel a $600,000 equipment order and rescind two job offers to highly trained machinists because his SBA loan application was not approved before the 2013 shutdown.
Then-acting SBA Administrator, Jeanne Hulit, wrote, “During the shutdown, I heard stories from small business owners about contracts cancelled or put on hold, workers they had to furlough, and the potential for shift and staff reductions…many small businesses are still struggling with how to take care of their employees as they see projects postponed.”
3. If your livelihood depends on tourism
One of the most indelible images of all government shutdowns is the closure signs posted outside national parks and landmarks. While some parks remain open during the current shutdown, albeit with a reduced level of service, many smaller sites are shuttered. If your business is located in the vicinity of a park, any closure can have devastating consequences.
Cancellations and reductions in traffic threatens small business livelihoods. National Park shutdown costs are already at $5 million and rising and our nation’s parks face years of damage as a result.
4. If you’re planning to hire
One overlooked aspect of the government shutdown is the government’s E-Verify website used to verify the eligibility of individuals to work in the U.S. During any shutdown, per the Department of Homeland Security and USCIS, employers will not be able to access their online accounts.
While it shouldn’t delay your hiring plans (USCIS usually approves a workaround), the E-Verify shutdown puts businesses at risk of non-compliance if they skip this important step to ensuring a legal workforce.
5. If military personnel are your big customers
Without an exemption, military personnel can be furloughed and lose pay during a shutdown.
If your business is located near a military base or is positioned in a military installation, lack of disposable income could hit your business hard during a shutdown.
The bottom line
Brief or prolonged, a federal government shutdown can throw a wrench in the works of business operations and plans. Shutdowns are a serious blow to small businesses and affect their ability to serve customers, access finance, invest, and ultimately, grow.
According to Small Business Majority, every time the government closes shop it diminishes consumer confidence and creates a huge amount of uncertainty.
Stay tuned for part two in this series, where we’ll discuss ways small business can plan for and mitigate the effect of government shutdowns if and when they happen.