Since the morning of December 22nd, 2018 the U.S. government has been operating under a partial shutdown. Approximately 800,000 federal workers from across the nine affected federal departments have been furloughed or are currently working without pay. As I’m writing, the shutdown is heading into its 24th day, and is the longest government shutdown in American history.
Obviously, the most immediate economic impact of the shutdown is felt by the furloughed federal workers. Unfortunately, they aren’t the only casualties. When the federal government is shuttered, small businesses suffer as well.
Some small businesses, such as those that rely on government contracts, are more obviously affected by the shutdown. According to Small Business Trends, in 2017 upwards of $105 billion in federal contracts were awarded to small businesses, contracts that are in danger of not being paid out.
The shutdown is having, and will continue to have, an increasingly negative impact on businesses across the board. Restaurants, retailers, manufacturers, tourism—you name it—could all face hardships.
To help you and your business weather this shutdown, it’s important to know how the shutdown could affect your business so you can prepare and react. Let’s look at 5 ways the shutdown could be hurting your business growth in 2019.
No New Hires
Part and parcel of business growth is hiring new employees. However, employers that are looking to bring on new employees could run into serious problems during the shutdown.
An unfortunate casualty of the shutdown is the federal E-Verify system, a web-based service that lets employers confirm an employee’s eligibility to work in the U.S.
The closure of the E-Verify system will be most acutely felt in states like Florida that require employers use the E-Verify system before hiring new employees. Companies in these states will have to wait until the system is back online before making hiring decisions and staffing their businesses.
No SBA Loans
As you can probably guess, the Small Business Administration is not an essential service for the government, and it too has closed its doors during the shutdown.
While disaster funding is still available, the 7(a) and 504 loan programs are suspended until full funding is made available. According to the National Association of Government Guaranteed Lenders, no new loans can be approved during the shutdown. No only that, but the SBA is not even maintaining a 7(a) loan queue for loan processing. These government guaranteed lenders also can’t increase any existing loans under their delegated authority.
As we’ve detailed elsewhere, the SBA 7(a) loan program can offer loans of up to $5 million. The delay or loss of that level of funding can severely stall business growth and could force a business not to hire new workers, not to buy a new piece of equipment, to put off starting construction, or even to put off buying a new business altogether!
SEC and Craft Beers
Many governmental agencies and departments function in an oversight capacity, and businesses often need to seek approval from these governmental agencies in order to proceed with planned business projects.
One such agency is the Securities and Exchange Commission, which regulates securities offerings. While it didn’t shut down entirely, effective December 27, 2018, the SEC did furlough 94% of its staff. The near-closure threw an enormous wrench in the plans of companies planning to go public in January, including Lyft and Uber and some biotech firms like Gossamer Bio Inc., and Alector Inc.
What is worse, a little-known agency called the Alcohol and Tobacco Tax and Trade Bureau (TBB), which approves new beer labels, new liquor stores, and new beer distribution across state lines, is closed as well. With the TBB closed, breweries nationwide are unable to launch new batches of craft beers. Entire production cycles and business plans are being put on hold because of a tiny piece of paper.
IRS Unavailable
Regardless of your personal stance toward the IRS, the loss of services during the shutdown could do some very real damage to your business and could stall your planned business growth.
First, anyone trying to create a new business entity will have trouble getting their employer identification number (EIN). In essence, this is a social security number for your business, and it’s vital to the operation of your business—without it you can’t open a business bank account or make payroll.
Filing for S corp status for your corporation or LLC is also unavailable until the IRS reopens.
The Worst Is Yet to Come?
A more serious problem may be yet to come. Between late January and early March of 2018, the IRS paid out $147.6 billion in tax refunds to American families. Many families rely on their yearly tax refunds, but, importantly, so do many small businesses. The massive infusion of spendable cash into the local economies generates vital revenue for businesses early in the year.
If the government shutdown continues into February, we could see delays in refunds while the $140 billion is frozen in the IRS. Big delays in receiving tax refunds could lead to equally big delays in spending those refunds, which could hurt small businesses.
Possible Good News
There is some good news (unless you’re an IRS employee). IRS Commissioner Chuck Rettig released a statement on January 7th that the IRS will start processing tax returns on January 28th and provide tax refunds as scheduled. He also said that he will start recalling the furloughed staff members. However, since no funding has been appropriated by Congress, any employees brought back would have to work without pay.
Ripple Effects
The final way the shutdown could hurt your business growth is also the most indirect way. As I said at the beginning, as of January 11th this is the longest government shutdown in American history, and, unfortunately, it looks like it could drag on for much longer.
Even if the IRS issues refunds on schedule, a prolonged shutdown throws many other aspects of the U.S. economy into turbulence. The long-term economic effects of this disruption are unknown, and uncertainty can be crippling. We are in uncharted territory.
Fortunately, 2018 was a good year for small businesses, and the prospects for 2019 were promising. More than that, entrepreneurs are tenacious and resilient. The shutdown could end tomorrow, with little to no impact on your business. But even if it doesn’t, smart and innovative business owners have always weathered these storms.
How Can We Help You?
Here at Alexander Abramson, we focus exclusively on business-related legal matters. We have advised closely held businesses for years on partnership arrangements, business entity formations, and business acquisitions through both economic downturns and economic booms.
Our staff strives to create a wonderful client-experience by actively listening and maintaining open lines of communication, consistently meeting deadlines, and being upfront about our pricing and services. Don’t trust the legal needs of your business to an attorney that can’t or won’t offer you the best service possible.
We would love to show you how we can help you grow your business despite minor setbacks and hiccups. Call us at 407-649-7777 or email a team member to set up an initial consultation!
