Will the government shutdown hurt businesses?
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UPDATED: Oct 8, 2013
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The government shutdown will hurt businesses due to halted government transactions, delayed new campaigns, and limited access to capital.
A recent Manta poll shows that owners are worried about how the shutdown and debt ceiling limitations could impact their bottom line. The poll of 1,000 small business owners found that only 40 percent are in favor of the government shutdown. Additionally, 60 percent believe it will have a negative effect on the economy.
Loans.org spoke with business owners across the country about how the shutdown can and will impact their business.
Halted Government Business
Across the country, thousands of companies depend on the government’s loyalty and business in order to operate normally. Contracted companies in the defense, pharmaceutical, and technological fields, among others, create products specifically for the federal government. These corporations and small businesses are likely to face sweeping financial issues in the coming weeks.
Both large and small organizations will see the overarching effect of a protracted government, according to Jonathan Frutkin, principal at the Phoenix-based Frutkin Law Firm.
Various types of businesses depend on the government running normally such as tourist locations. Cafes and shops near national parks and museums will suffer while the federally-funded destinations remain closed.
“Even a company that simply supplies coffee to a federal government office is not getting paid,” he said. “In turn, these vendors can’t pay their employees or their own suppliers.”
Unless the federally-approved project is contracted and paid in full, these companies will likely face a period of lagging sales and unpaid invoices, which could create financial tension in larger companies and even bankrupt smaller businesses.
Frutkin believes that the American economy is resilient and should be able to recover, but for a few small businesses, this event will cost them everything.
“Even if it is a handful of businesses and a handful of jobs, it is a shame that politics will have a real human cost,” he said.
Other experts believe that the shutdown alone should not cause any long-term economic impact.
“It’s not ideal, but not calamitous either,” said Gordon Gray, director of fiscal policy at the American Action Forum.
Another less apparent impact is the elimination of tracking websites. The government runs various economic tracking websites such as unemployment rates and housing data. Many businesses rely on this economic data released by the government to track and prepare their business operations. Without it, reliant businesses are forced to use alternate data sites or remain unprepared for future weeks.
Ian Aronovich, president and cofounder of GovernmentAuctions.org, said the shutdown is causing issues with his website. He is having difficulty updating his database because any auctions hosted by the government are at a standstill.
“We can’t stay this way for too long,” he said.
Aronovich said that businesses not directly involved with federal services should not feel any immediate impact. But he stressed that if the debt ceiling is breached, a “worldwide economic impact” will occur.
The second sweeping impact of the shutdown is a delay in normal business operations. One business owner told loans.org that her organization will withhold new campaigns until the government ordeal is resolved.
For Melih Oztalay, CEO of SmartFinds Internet Marketing, the shutdown has forced his business to delay new sales and marketing initiatives until after October 17. This is the deadline for the debt ceiling, when Congress must raise the debt ceiling or face a deficit which limits the government’s ability to repay their debt obligations.
He is reluctant to spend additional business capital due to a vivid memory of government inaction five years ago.
“Having witnessed the events in September 2008, I cannot trust either party in Washington to do the right thing,” Oztalay said. “They are all in it for their next election and have no courage to move forward with governing the country.”
With these circumstances, he will wait until there is more economic certainty until he spends his money.
Limited Capital and Funding
The final negative impact of the shutdown is a reduction and elimination of business funding.
The government lender for small businesses, the U.S. Small Business Administration (SBA), is mainly closed. The majority of the SBA employees have been furloughed and are not able to process new business loan applications.
Before the shutdown, the SBA released a statement against the shutdown stating that “there is enough time for Congress to prevent a lapse in appropriations.”
The main loan programs, the 7(a) loan and the 504 certified development loan, are at a standstill until the SBA’s employees return. Several less popular loan programs and mentoring options are also closed. The only program that will remain open is the disaster loan program.
Since the SBA is the main lender for small business loans, owners must turn to other viable options.
Stephen Sheinbaum, CEO of Merchant Cash and Capital, said Google search terms for alternative business loans, SBA lenders, business loans, and unsecured business loans has increased.
“Businesses are seeking alternative funding while the government is shut down,” he said.
Oztalay said the shutdown could harm the financial structure of small businesses more than large businesses. He plans to keep cash on hand, but realizes he is more prepared than he was during the last financial crisis.
“Small businesses will have to button down the hatches quickly and not wait in order to sustain a longer term financial cliff,” he said.
There will likely be one large residual effect once federal employees return post-shutdown: delays.
Although it is difficult to quantify now, Gray wonders what kind of work backlog will occur.
“Delays and mistakes happen in a fully operational federal government, so effects specifically related to the shutdown will be difficult to discern,” he said.