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How a Government Shutdown Hurts Small Businesses

Adam Uzialko
Adam Uzialko
Editor
Business News Daily Staff
Updated Jan 27, 2023

Whether it means losing access to loans or not getting paid for government contracts, the impact of a government shutdown on small businesses can be significant.

  • Government shutdowns can have a negative impact on small businesses due to a lack of funding and decreased profits.
  • Certain processes are also delayed, such as IRS services and small business loans.
  • The industries most impacted by government shutdowns are restaurants, travel and personal services.
  • This article is for companies currently experiencing a government shutdown or would like to prepare for the possibility of one. 

Anytime the government shuts down, the public loses access to a wide range of services. The same is true for small businesses, which often rely on government programs intended to encourage entrepreneurship. When the federal government fails to keep the lights on, small businesses suffer alongside furloughed public workers. Here’s a look at what to expect anytime the government shuts down.

Effects of government shutdowns on small businesses

During a government shutdown, small businesses may experience the following effects.

No small business loans

Any small business owner hoping to get a loan through the U.S. Small Business Administration will have to wait for the shutdown to end. Processing for most SBA lending programs will be on hold when the agency’s employees are furloughed.

According to the National Association of Government Guaranteed Lenders, “routine actions requiring SBA’s approval cannot be processed” during the government shutdown. Lenders won’t be able to submit loans into an approval queue for SBA processing, and they can’t receive 7(a) loan numbers during the shutdown. Therefore, they are not able approve loans under their delegated authority.

Slower hiring

Employers looking to hire new employees during a shutdown could run into problems. One of the casualties of a shutdown is access to the federal E-Verify, an internet-based system that allows businesses to determine their employees’ eligibility to work in the United States. This has serious implications in states that are required to verify employees’ legal status via the program before they are hired. Many recruiters hold off on their hiring plans, and many job movers opt to wait until the government shutdown ends.

Limited IRS availability

Although at first this might sound like cause for celebration, the IRS does not stop fulfilling its duties as Uncle Sam’s tax collector during a shutdown. Limited availability does mean the agency will not be able to answer taxpayers’ questions about their tax liabilities. That includes small businesses. Moreover, the IRS will not issue refunds, process 1040-X amended returns or conduct audits.

IRS operations that continue during a shutdown include the enforcement of small business tax laws and the processing of electronic returns up to the point of refund and paper returns by “batching.” However, don’t expect any clarification on your tax questions or to receive your refund until the government shutdown ends.

Federal employee business

Whenever the government shuts down, legions of federal workers find themselves on furlough. That means no more lunches at nearby restaurants and no quick trips to the store on the way home. Small businesses located around federal buildings, national parks or monuments might find a drop in demand until the government shutdown ends and furloughed workers return. Nowhere is the impact greater than in Washington, D.C., where most federal employees are based.

International travel delays

Small businesses whose employees are planning international work may have to reschedule those trips if they are still waiting to receive their passports when a shutdown starts. While the U.S. Department of State still generally issues passports in times of shutdown, delays are expected, especially if passport offices are located in federal buildings that are closed.

Although it could be easy to conflate government with regulation, the public services small businesses have come to rely on are apparent when they no longer function. Part of weathering the storm of a government shutdown is being prepared for the roadblocks that come with it. While there is little the average entrepreneur can do to affect policy in the nation’s capital, there is plenty you can do to keep business running as usual until Washington reopens its doors.

Did you know?Did you know?: The longest government shutdown in American history occurred from 2018 to 2019 and lasted 34 days. This easily beats the previous 21-day record set from 1995 through 1996.

Industries most affected by government shutdowns

When the government shuts down, some businesses are hit harder than others. Essential businesses that must stay open will not suffer much negative economic impact in most cases. Some businesses even increase sales during government shutdowns, such as grocery stores and warehouse clubs.

According to a CNBC article, the following industries are impacted the most by government shutdowns:

  • Agriculture
  • Telecommunications
  • Tourism 
  • Housing

Small businesses are hit especially hard during government shutdowns, since they have limited resources to rely on compared to corporations. 

Tips for surviving a government shutdown

While a government shutdown is bad news for most small businesses, it’s not impossible to get through one. Play your cards right, and you can even come out the other side while only losing a little of your bottom line. Below are a few tips to help you make it through a shutdown relatively unscathed.

Collect money that you’re owed.

First, attempt to collect your clients’ debts as soon as possible. There’s likely ample capital in your accounts receivable, and calling it in can give you the extra resources you need to survive the shutdown. Do this before the shutdown to avoid a situation in which your clients can’t pay their bills for the same reasons you’re looking to collect. 

Reduce expenses.

Look around your office and pore over your books to find expenses that are either unnecessary or lower in priority during a shutdown. Unnecessary equipment and inefficient internal processes should be some of the first things to go. Laying off employees should be a last resort. Training new, less expensive hires will often cost you more money in the short term. On top of that, layoffs signal a lack of the compassion that distinguishes great businesses from good ones.

TipTip: While a government shutdown often hurts small businesses, it’s also an opportunity to remove inefficiencies in your business model and find new clients. This way, once the shutdown is over, you’re more ready for success than you were before.

Take out a loan.

Signing up for a short-term loan is also a valuable option if you might run into financial trouble during a government shutdown. While long-term SBA loans may lie out of reach during a shutdown, private loans can help during such emergencies. If you find one with a good payout and terms, you can be more prepared to face what troubles the shutdown causes. For example, read our Fora Financial review to learn why this vendor is a great choice for short-term private loans and our guide to best business loans.

Contact vendors and creditors.

As you try to collect on your clients’ debts, it’s also important to settle your own. If you have bills you can’t afford to pay right now, call the vendor or creditor and explain the situation. They may work with you to adjust your payment schedule in ways that accommodate any revenue losses during a government shutdown.

Seek out clients.

During government shutdowns, your clients might not have as much money to spend with you. But what if you take the time to seek out more clients? The money each new client can spend on your business, when added together, can make up for your current clients’ lower spending.

While you might not be able to fund an extensive marketing campaign, you can give discounts and other deals to attract new customers. Offer these same deals to clients who haven’t purchased your products or services in a while to try and regain their business. 

Guiding your business through a government shutdown

Many essential processes stop during a government shutdown. That makes it difficult for a small business to maintain the same level of resources. While outlasting these events can be an uphill battle, there are plenty of strategies you can employ to ensure your company remains standing. 

Additional reporting by Isaiah Atkins and Max Freedman.

Image Credit: Mladen Zivkovic / Getty Images
Adam Uzialko
Adam Uzialko
Business News Daily Staff
Adam Uzialko is a writer and editor at business.com and Business News Daily. He has 7 years of professional experience with a focus on small businesses and startups. He has covered topics including digital marketing, SEO, business communications, and public policy. He has also written about emerging technologies and their intersection with business, including artificial intelligence, the Internet of Things, and blockchain.