January 31, 2019

The Real Cost Of The Government Shutdown On Small Business (Forbes) »

The government shutdown may be over (for now), but the effects of the 35-day closure will be be felt for a long time, especially by the nation’s small businesses.

In case you missed it, the Congressional Budget Office has announced the shutdown will cost the economy $11 billion. That only takes into account lost output from federal workers, delayed government spending and reduced demand. While a portion of the cost can be reversed as federal workers return to their jobs, the true cost of the shutdown to small businesses could be devastating, and in some cases a knock-out punch.

Exacerbated Cash Flow Woes

I work with small businesses every day, and in fact, I’m the CEO of one. We are the heart and soul of the economy, accounting for 64 percent of net new jobs in the U.S. While collectively, we are mighty, small businesses face unique challenges. In the case of a government shutdown, we’re much more likely than larger businesses to feel the short- and long-term effects.

Over the last couple of weeks, I’ve heard from several small business owners, each with their own set of challenges resulting from the shutdown. In particular, companies running operations in and around the country’s National Parks took a big hit.

Fitpacking hosts backpacking adventure vacations for people looking to lose weight and get in shape. When many of the National Parks closed or limited services as a result of the shutdown, Fitpacking’s sales came to a screeching halt. Even now, potential customers are not booking trips due to the uncertainty of available services. Each cancelled trip costs the company about 5% of its annual income—money it will never get back. In the meantime, Fitpacking’s owner has picked up another job to generate income, cutting into the time he would spend growing his startup.

Take a look at the results of this survey from Womply. They talked to 2,300 business owners in all 50 states about their financial capabilities and runway. The majority operate on a razor-thin budget with respect to cash on hand. If sales completely stopped, they’re not equipped to continue operating for very long.

Anything from a hike in interest rates to a natural disaster to a prolonged government shutdown can have a dramatic impact on small businesses. The cash flow struggle is real, and it has been exacerbated by the recent shutdown, forcing many business owners to reassess their 2019 growth plans.

SBA & IRS Backlogs

Speaking of 2019 growth plans, the shutdown came at a time when many businesses were poised to receive funding through the SBA. One in particular is Shop Good, a one-stop clean beauty and wellness boutique and spa. Based in San Diego with plans to expand to a second location in Carmel Valley, the business was approved for an SBA-backed loan before the shutdown. But when the government closed, the loan didn’t fund and delays started piling up immediately. Construction timelines were thrown out of whack—around 25 contractors and subcontractors moved on to other jobs. Until funds become available, Shop Good cannot hire and train the new employees it needs, and if the new location isn’t completed on time, the business will be penalized by the lease contract.

With the SBA backlog piling up, businesses owners are putting expansion plans on hold or seeking alternative sources of funding. Shop Good is using funds originally earmarked for hiring and marketing to purchase necessary equipment; but without the marketing dollars, sales could take a hit. While the SBA catches up, small businesses looking to grow will have to absorb the costs of higher interest rates for non-SBA backed sources of capital.

Adding insult to injury, it’s tax season now—a stressful time for most small business owners, particularly as they struggle to understand the new tax code. It’s also a critical time as many business owners count on their returns each year to buy new supplies or cover expenses from the previous month. While the IRS is operating at full force again, tax returns will likely be delayed beyond the typical 21-day turnaround time, adding to the cash flow woes of many a small business. As CBS reported, when the IRS returned from the shutdown, there were 5 million new pieces of mailwaiting to be opened with 700,000 more coming each day.

Time IS Money

Yet another effect of the shutdown, small companies like Sahara Rosecouldn’t access export information to send shipments of products internationally. Labeling and customs information was unavailable and the website export.gov was shut down. The site, which is a collaboration between the U.S. Department of Commerce’s International Trade Administration and other government agencies, helps businesses navigate the complex process of expanding into international sales. During the shutdown, companies like Sahara Rose were forced to sit and wait, or do their own export research using less reliable and more expensive sources in the private sector.

I understand firsthand the costly effects of putting growth plans on hold. Several years ago at Lendio we were getting ready to wrap up a new round of funding. We spent months preparing for the infusion of capital in the form of hiring, equipment and new tech. In the 11th hour, that funding fell through. I had to go back and tell our managers their new budgets and growth plans were all on hold. We lost several weeks of precious time and missed out on opportunities to generate new revenue as a company. Time is money, particularly for a growing business.

It remains to be seen what the backlog of SBA loan applications looks like, how long it will take the IRS to catch up or how quickly local economies will recover from the reduced demand and loss in output. One thing is certain: entrepreneurs are resourceful. Small businesses will feel the effects of the shutdown for months to come, but they will also use these challenges to strengthen their resolve.

Brock Blake: Founder / CEO of Lendio, the nation’s #1 marketplace for small business loans. You can reach Brock on Twitter at @brockblake or at www.lendio.com.

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