In its fourth week, the government shutdown that started on December 21, 2018, has had a profound impact on the U.S. economy. Going down in history as the longest shutdown, it has paralyzed whole sectors because federal institutions are closed or are functioning at limited capacity. J.P. Morgan estimated that the losses account to $1.5 billion for every week of the standoff between President Trump and the Congress.
As in other force majeure situations, small businesses feel the effects of the administrative blockage the most. For thousands of companies, the last few weeks have been tough due to financial losses and missed business opportunities.
Among the numerous federal departments and agencies that have been affected by the shutdown, the Small Business Administration has been closed since December 22. This has strong negative effects for companies using its 7A Guaranteed Lending Program and 504 Loan Program, as well as its Surety Bond Program. The SBA typically approves around $500 million in loans per week. Businesses relying on these programs have not been able to benefit from them in the last month since federal employees at the SBA are furloughed.
Since the close, the SBA is not processing loans. This has delayed more than $2 million in lending that was supposed to finance real estate deals, equipment purchases, and other development needs. The result for impacted businesses is a limbo in which they risk losing down payments and deposits. The effect is especially distressing for companies that sought SBA Express loans for immediate financing needs.
Many of them have made initial payments for a commercial property and are now awaiting the SBA loan that was supposed to finance the purchase. As sellers are becoming impatient, companies are forced to look for other ways to cope with the situation. They have to either put on the line their payment or seek flexibility and understanding from the seller, which is not guaranteed.
Some businesses have increased the deposits for their dreamed real estate with the hope to appease property owners and prolong the period in which they can wait for the SBA financing. For others, the most viable option has been to seek financing from other sources, as not to lose the opportunities and already made investments.
As the Washington Post reports, the situation is especially tough for small business owners who were on the finishing line of buying property when the shutdown started. Such is the case of computer specialist Brooks Troxler who had to receive a $550,000 SBA loan for a real estate deal. If the delay continues, he may lose not only the possibility to have a new business location, but also a lot of money invested in fees, appraisals and other administrative costs.
Construction businesses relying on the SBA Surety Bond Guarantee Program have also been heavily affected by the shutdown. Contractors often have to provide contract surety bonds when they bid on public and private projects. The bonding is typically required on federal contracts, as well as on many other public ones. However, for many new and small businesses, obtaining the necessary bonding is difficult or impossible because of financial issues or lack of required experience in the field.
The Program helps contractors by guaranteeing for their bonding in front of surety providers. It supports contractors with guarantees on individual contracts of up to $6.5 million. This can be increased to $10 million in some cases.
In recent weeks, contractors have not been able to obtain support from the SBA. As a result, they cannot get the required surety bonds, as sureties are reluctant to extend backing to applicants that pose a higher risk. This has left many budding construction companies out of the bidding on projects. The repercussions for small contractors are the most serious, since winning a contract can be decisive for their development.
How has the government shutdown affected your small business? What steps have you taken to mitigate its effects? Please share your thoughts in the comments below.