When Texas business owners Veronica and Craig Bradley put together an application for a loan from the U.S. Small Business Administration, they detailed the risks big and small that could derail their startup brewery.
The couple filled a page with hypothetical unexpected events that could prevent Vector Brewing from making a profit, going so far as to include their own deaths, according to Veronica Bradley.
“The one thing we didn’t account for was a government shutdown,” she said. “Who thinks that’s going to happen?”
A partial government shutdown started Dec. 22, days before the Bradleys planned to submit an application for a $1 million SBA loan to fund the construction and operation of Vector Brewing in Lake Highlands, Texas. The SBA went dark during the 35-day shutdown, delaying SBA funding for many small business owners like the Bradleys.
The federal government reopened a record 35 days later on Jan. 25 after the House and the Senate passed a stopgap spending bill to restore operations until Feb. 15. If that deadline rolls around without a permanent funding agreement, the government could fall into a second shutdown that would impact small businesses still recovering from the first.
Negotiators in Congress have reached a tentative deal that would evade another shutdown, but it’s not yet set in stone. And although the recent shutdown was the longest in U.S. history, it was far from being the first one. There have been 21 stoppages in government funding since 1976, with three shutdowns occurring in 2018 alone.
The Bradleys aren’t waiting for the other shoe to drop — they have a contingency plan. They learned valuable lessons the first time around and are better prepared for another shutdown. We’ll help you understand the widespread impact of the shutdown and help you make your own plans for any unforeseen circumstances.
Effects of the shutdown
The partial government shutdown directly impacted 21% of business owners, creating delays and interrupting regular operations.
In addition to the suspension of SBA loan approvals, federal data services were inaccessible. The E-Verify system was suspended during the shutdown, which meant business owners could not use the platform to confirm the employment eligibility of new workers. Private-sector entities that experienced business shortages during the shutdown will likely never recoup that lost income; about $3 billion in lost GDP growth will not be recovered either.
Small government contractors were hit hard – 41,000 small business contractors lost $2.3 billion in revenue, according to data from the U.S. Chamber of Commerce. “It is really eye opening, down to the nickel and penny of what some of these small business owners lost,” said Tom Sullivan, vice president of small business policy for the U.S. Chamber of Commerce.
What would a second shutdown mean for small businesses?
Two back-to-back shutdowns could deal a major blow to small business owners who depend on the federal government, not just for data services or the loans it guarantees, but also for important federal permits. The Bradleys are among numerous brewery owners waiting for permits from the Alcohol and Tobacco Tax and Trade Bureau needed to brew and sell beer. The timing of a possible second shutdown would be another huge hit, as it could limit the scope of the IRS as tax season nears.
The threat of a second shutdown is on Bradley’s mind every time she writes a check. Until the SBA loan comes through — she and her husband were finally able to apply in late January — the Bradleys must pay business expenses out of pocket. The brewery isn’t open yet, but the Bradleys’ landlord, attorney, financial advisor, contractors and architects are waiting for payment, Bradley said.
“This has been a very scary balancing game,” she said.
Before the shutdown, her banker told her to expect to receive funding in eight to 12 weeks. Now, the SBA doesn’t know how long it will be until the loan is funded, she said.
The Bradleys’ home state of Texas is second only to California in suffering the effects of the partial government shutdown, according to research from ValuePenguin (ValuePenguin is an affiliate of LendingTree, MagnifyMoney’s parent company). Since 2010, the SBA has issued more than $177 billion in 7(a) loans, the most common SBA loan for small business owners, with the most money going to entrepreneurs in California, Texas, New York, Florida and Ohio, per ValuePenguin. SBA loans typically range in size from $500 to $5 million. The SBA does not loan directly to business owners, instead guaranteeing loans issued by partner lenders such as banks, community development organizations and microlending institutions. Backing from the SBA reduces risk for lenders and helps business owners qualify for financing with favorable interest rates and repayment terms.
As those banks waited for SBA approvals, the money slowed, which has business owners like Bradley wondering if another government shutdown could impact business owners who rely on any type of bank financing, not just SBA loans solely. If SBA loans are off the table, she said competition could increase for other small business loans or lines of credit. A lack of access to capital has long been a complaint of small business owners.
“Everyone who wanted to go the SBA route is going to have to clamor for other sources of income,” or else wait, potentially stifling growth, she said. “This affects everyone.”
Alternative lenders are an option
Bernardo Martinez is U.S. managing director of Funding Circle, one of many online lenders serving as an alternative to brick-and-mortar banks that have long dominated small business lending. Although he is not expecting banks to retract from business lending, a pause would create an opportunity for alternative lenders like Funding Circle to serve more business owners.
When traditional financing is out of reach for any reason, alternative business lenders can provide funding solutions for small business owners. Funding Circle had strong loan originations in January, Martinez said, but the company isn’t crediting the shutdown.
“In January, we saw a good volume month,” he said. “But I do not believe we can pinpoint specifically to the shutdown.”
Like Funding Circle, many online business lenders could provide faster time to funding than traditional banks with less stringent eligibility requirements. These lenders consider factors such as customer reviews and current cash flow when approving borrowers, but rates are typically higher than other types of business loans.
Although Martinez said Funding Circle isn’t planning to target business owners affected by a government shutdown, online small business lender QuickBridge has a video on its homepage discussing the benefits of alternative lenders during unforeseen circumstances, including the government shutdown.
At Funding Circle, “that will create an opportunity, but right now we’re not thinking about it or seeing it in the market,” Martinez said.
How to prepare for the next shutdown – or any business interruption
As the possibility of another shutdown looms, Bradley is weighing her financing options for the brewery. Before deciding to pursue an SBA loan, Bradley and her husband considered bringing on investors or using online crowdfunding platforms to raise money. If their SBA loan is delayed a second time, they might return to their original strategy.
“If it stays shut down for a week, I see it staying shut down for another month,” she said. “If the government shuts down for another 30 days we can’t wait.”
Bradley is putting together materials to present to investors and considering asking her bank for a small business loan to tide them over until more financing comes through, she said. It’s important for small business owners to have a back-up plan if things go wrong, she said, even if it’s not ideal.
How to handle the unexpected
Keep communication open.
Like any relationship, you need open communication with the people you do business with, Bradley said. If you’re facing financial trouble or other issues within your business, you should inform your vendors, advisors and anyone else who interacts with your company.
Vendor relationships became imperative during the shutdown for business owners who needed to catch a break, said Sullivan at the U.S. Chamber of Commerce.
Bradley was able to work out a deal with her landlord and contractors after explaining the delay in SBA funding. Being upfront helps you maintain credibility and trustworthiness as a business owner, she said.
Track your spending.
Keep track of every penny you spend, Bradley said, especially when you’re in distress. You should keep your personal and business finances separate so you can clearly see how much you’re putting into the business. When it’s time to apply for financing, you’ll likely need to explain your business spending to be approved for a loan, she said.
Understand your financial needs.
If you need to apply for business financing to get you through a rough period, you should know the specific expenses that you need to cover, Martinez said. That way, you would be able to borrow the exact amount you need, rather than estimating too high or too low. You would have a better chance of finding the right lender if you know exactly what you need, he said.
Read the fine print.
Keep your financial documents in order so you could apply for financing at a moment’s notice. Be sure to understand each lender’s terms and conditions before applying, Martinez said, especially if you’re looking for financing from an alternative lending institution. Each lender has its own pricing structure, and you may want to talk to the lender directly to understand what’s required of borrowers, Martinez said.
Stash money in an emergency fund.
You should generally have three to six months’ worth of expenses saved in case of emergency — that would give you a financial cushion to fall back on during any kind of business interruption, such as a government shutdown. It could also be a good idea have a line of credit or credit card available as well if you don’t have enough in your emergency account.
“Whether it’s a wildfire, a flood or a government shutdown, there’s an opportunity there for small business owners to rethink their cash flow and think very seriously about creating reserve funds,” Sullivan said.
If the federal government shuts down again, even if the closure lasts a few days, the repercussions for small business owners could be monumental. You should prepare as best you can to minimize the impact on your operation.
“Those 35 days it was shut down put us at least three months behind,” Bradley said. “It’s crazy.”