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Government Shutdown Impact on Small Business Loans

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Small Business Administration Seal by US Government via Wikipedia Commons

Small Business Administration Seal by US Government via Wikipedia Commons

It wasn’t the owner of your favorite local mom-and-pop shop who decided to shut down the United States government in October, but they were the ones who paid the price in the end.

Small business lending took a serious hit as a result of this year’s government shutdown, according to the Biz2Credit Small Business Lending index, with approval rates dropping as high as 20 percent.

Bigger banks with over $10 billion in assets recorded a measly 14.3 percent approval rate in October alone. Small banks dropped from 50.1 percent in September to 44.3 percent because of the shutdown, while credit unions dropped 4 percent to a 43.4 percent approval rate, SmallBizTrends.com reported.

And with the Small Business Administration out of commission, the numbers had nowhere to go but down.

“SBA loan approvals stalled because the agency was closed for three weeks,” Biz2Credit CEO Rohit Arora told Smallbiztrends.com. “Similarly, non-SBA loans could not be processed during the government shutdown because the IRS was not operating.  Banks could not acquire income verification from the IRS during the shutdown, which is needed to approve many loan requests.”

The damage spanned far beyond just the shutdown, too, Arora said. According to the CEO, it should take months for the SBA to play catch-up with a huge backlog of loans to process –all of which might be impacted by future political impasses in Washington, D.C.

But there was a silver lining in the government’s inability to execute earlier this year –especially if you worked for a non-traditional alternative lender. Small businesses were left desperate for anyone willing to pick up the slack leftover from the SBA on lockdown and their wishes were granted.

Reports showed that approval rates for alternative lenders skyrocketed to an Index-high 67.3 percent in October 2013, up from 63.2 in the previous month. But nothing was perfect for small businesses, which in return had to pay much higher interest rates to stay afloat.

“Small business owners desperate for capital during the shutdown turned to alternative lenders, who were willing and able to provide money, but at a much higher interest rate than a bank or credit union would charge,” Arora told the website.  “The stop in the flow of capital came at a time of year when small businesses traditionally search for funding.  The economy, which is still in the weak recovery phase, simply cannot sustain this kind of disruption.”

Those dark days, however, should be behind America’s small businesses. The government has since rebounded and so will small businesses, Arora told the small business website.

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