We are mere weeks away from a government shutdown — and some voices in Congress are actively cheering for it. According to Freedom Caucus member Rep. Bob Good (R-Va.), “We should not fear government shutdown. Most of the American people won’t even miss if the government is shut down temporarily.”
Not only is that categorically untrue, but it would be disastrous for small businesses in America.
If the government can’t pass a budget, American workers and small-business owners will pay the price. There are more than 33-million small businesses across the country. Many of them depend on federal loans, federal contracts and federal support. When the lights of government go out, so do these capital and customers.
Take access to affordable capital — it’s essential for business owners, yet many face obstacles or challenges when it comes to financing. According to Federal Reserve data, minority-owned businesses are even more capital-conscious. Black and Hispanic business owners are two to three times less likely to receive all their financing compared to white-owned businesses. Almost half received no financing at all.
If the government shuts down, the U.S. Small Business Administration (SBA) stops processing new loans and approving routine small-business loans that the agency backs to ensure entrepreneurs have access to funding. SBA loans are a lifeline for many entrepreneurs, who generally can borrow as much as $5 million to start, buy, expand or run a small business through the agency’s two biggest programs. When the government is operating, SBA covers as much as 90 percent of loan losses, giving an incentive to banks and other financial institutions to finance businesses they might not otherwise serve.
If businesses can’t get loans from the SBA, entrepreneurs may have to take desperate measures to keep afloat. Michael Pearce, owner of a retail store and restaurant in Fairfax, Va., was one of many who had to turn to a high-cost, short-term lender because he couldn’t get an SBA line of credit to carry his second location during the last government shutdown. As a result, he had to pay $23,000 in interest and fees on the $50,000 he borrowed to meet payroll.
Beyond financing, the US government is the largest customer in the world. It’s legally required to buy from small businesses — that is, if America is open and not shut down. Some small businesses secure contracts with federal agencies to sustain their operations and provide stable employment for their workforce. Others are subcontractors to other larger federal contractors. The House Committee on Small Business reported that a shutdown could cause small businesses to forgo $301.6 million on a daily basis.
Beyond immediate financial hardships, the impacts of a government shutdown on small businesses can have lasting consequences. If drawn out, we could expect layoffs and downsizing, further deepening the economic impact on local communities. Entrepreneurs may become wary of starting new ventures, fearing the unpredictable business environment. That loss of new businesses means less intergenerational wealth, fewer jobs and fewer community opportunities.
But extremism doesn’t have to win out over the American people. Rather than shutting down the government, Congress should follow the fiscal deal that House Speaker Kevin McCarthy (R-Calif.) and President Biden cut. Fund agencies at the McCarthy-Biden levels so that financing and contracts continue.
Frankly, that should be the floor; Congress can do far more. There’s opportunity to boost small-dollar loans for businesses with a credit gap. Access to investment capital can be diversified, so it’s not concentrated in a few high-flying coastal towns. Federal contracting bureaucracy can be streamlined, as can oversight and accountability.
Another Freedom Caucus member, Rep. Byron Donalds (R-Fla.), said, “If [a government shutdown] is a requirement to break bad habits, so be it.” What if the bad habit we actually need to break is the constant threat to shut down the government? The resulting financial strain, uncertainty and disruption to small businesses and entrepreneurs can be catastrophic.
Madeline Burke is the communications and content adviser of the Alliance for Entrepreneurial Equity, a joint effort between Third Way and the National Urban League.
Gabe Horwitz is senior vice president for the economic program at Third Way.