Policy

The Shutdown's Ripples Are Already Frustrating Small Businesses


The Shutdown's Ripples Are Already Frustrating Small Businesses

Photograph by Angela Wyant/Getty Images

Yolanda Lewis remembers the days leading up to the government shutdown in 1995 as a frustrating time. Her company, San Jose-based Innovative Resources, had a contract to provide janitorial services to Walter Reed Army Medical Center in Washington. “We didn’t know if our contract was going to be deemed non-essential, and we didn’t know if the government workers that we depended on inside the facility were going to be furloughed,” she says. “We prayed that payroll processing wasn’t going to be shut down.”

For small business owners such as Lewis, Congress’s failure to pass legislation to fund the federal government means a fresh helping of uncertainty. Contractors will have to manage cash flow as payments for government work may be delayed or canceled outright. Companies hoping to expand their business, using loans guaranteed by the Small Business Administration, will have to wait for the agency to return to normal operations. Others expect less business as federal employees pull back on spending, draining local economies.

With 800,000 federal workers furloughed and thousands more diverted from ordinary duties to sustain essential operations, the biggest frustration may be finding a government worker to answer simple questions. Henry Passapera’s 12-employee company, P&R Trading, sells aircraft parts to the  U.S. Department of Defense. “We’ve purchased parts for the U.S. government, and we’re ready to ship them out,” he says. “But we haven’t received our shipping instructions. When is that going to happen?”

The timing of the current shutdown is especially disruptive, says Rebecca Rubin, chief executive officer of Marstel-Day, a 130-employee environmental consulting firm that contracts with federal agencies to turn shuttered military bases into parkland. Many federal contracts are scheduled to start today, Rubin says, because the government’s fiscal year begins on Oct. 1. “Technically, you can’t start a project until you have a kick-off meeting,” she says. “If there’s no one from the government to talk to, there’s only so much work you can do.”

For Marstel-Day, the effects of the shutdown will worsen the longer it goes, but Rubin expects to be paid in full—eventually. That’s not true for all contractors. During previous government shutdowns, federal employees were paid for the time they were furloughed, but contractors were not, says Alan Chvotkin, executive vice president of the Professional Services Council, which represents contractors. “Government contractor employees who were furloughed were never reimbursed. That truly is lost time and lost wages that can never be made up.”

Entrepreneurs won’t be able to turn to the Small Business Administration for help navigating the shutdown. The agency, which helps small businesses win government contracts and guarantees tens of billions of dollars in loans each year, is expected to furlough 62 percent of its staff. The remaining workers will focus on its disaster lending program. The agency will honor guarantees on existing loans throughout the shutdown, says spokeswoman Kathleen Sheehy.

Even so, there’s a pool of small business owners who think they have SBA loans that could fall through the cracks, says Beth Solomon, chief executive officer of the National Association of Development Companies, whose members provide 97 percent of the SBA’s 504 loans.

The organization plans to sell about $350 million in bonds backed by loans guaranteed by the SBA on Oct. 16, but it still needs signatures from SBA officials to go through with the sale. If that doesn’t happen, about 500 small business owners who’ve had SBA loans approved won’t get funding. “I asked, point blank, are there going to be essential personnel available? We were told government shutdown means a government shutdown,” she says.

Only a small percentage of small businesses get loans backed by the SBA or have contracts with the federal government. Jason Holstine’s seven-employee company Amicus Green Building Center sells environmentally friendly building supplies in the Washington suburb of Kensington, Md. Holstine wants the impasse settled so that his customers, many of whom are federal workers or government contractors, can resume their home improvement projects. “We already have a number of people who put projects on hold because of the sequester,” he says. “Dating back a month or six weeks, we saw more chilling.”

A recent survey by Pepperdine University (PDF) of nearly 1,400 small business owners  showed 48 percent of respondents supported a potential shutdown. “Many business owners desire the stability of a more permanent resolution to the nation’s recurring fiscal problems,” says Pepperdine’s Craig R. Everett in a statement.

Small business owners are also divided on the health-care reform law at the heart of the impasse. Some see it as a means to controlling health-care costs that have increased rapidly in recent years. Others, particularly those with more than 50 workers, say the law puts them in the unfair position of having to curtail growth to avoid the cost of providing mandatory coverage to their workers.

The shutdown was driven by House Republicans’ inclusion of measures to weaken or delay Obamacare in legislation to fund the federal government. Meanwhile, health marketplaces that give Americans a new way to shop for health insurance opened today, in spite of the shutdown: They were paid for when Congress passed the health care legislation in 2010.

With John Tozzi
Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

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