Most of the time, campaigns for presidency will include a promise to build a strong economic foundation for the nation. The latest issue on the threat of government shutdown due to the problems with the approval for funding the border wall highlighted how the shutdown would threaten local banks and small businesses.

What Happens to Small Business during Government Shutdown

The latest government shutdown happened in 2013, during Barack Obama’s administration. At that time, Senate that was held by Democratic Party clashed with House of Representative that was held by Republican Party over the Obamacare program. The shutdown lasted from 1 to 16 October. The clash was proved to have adverse effect upon the economic growth.

In the 2013 government shutdown, economic growth slowed down. In addition, approval rate of small business loan declined dramatically at banks. A report issued by Biz2Credit Small Business Lending Index, approval rates for small business loans dropped by nearly 20% every month. A worse condition happened in the loan approval rates at small banks. The loan approval rates dropped by 44.3%.

In the 2013 shutdown, some small banks could not even process loan approval paperwork. SBA and the IRS – both of which played important roles in administrative loan processing – were closed. It really hurt small business borrowers. Due to the adverse effects, many people were concerned with the threat of government shutdown in response to the border security problems.

How Government Shutdown Affects Small Business

Small businesses and small banks were at the most disadvantageous position during the government shutdown. In case that the government decides to shut down, the following things may happen.

Small Banks Shutdown

Most small banks survive in business due to the government backing. When the government shuts down, the effect is predictable: the small banks lose their support. As a result, they would not be able to close the loan deals. The small businesses would lose the sources of capital when small banks were closed.

Furthermore, small banks go beyond just providing the businesses with funding supports. They offer business mentorship and guidance to help the entrepreneurs and startups survive in the business. During the shutdown, both small businesses and banks would suffer.

Shake of the Confidence in Economy

The government shutdown could destroy the confidence in the economy. As a result, unemployment rate could rise, while the well-performing economy could slow down. Optimism among the small businesses could be destroyed. Foreign investment could go away. In the end, economic growth could decrease dramatically. According to the economists, a shutdown could deny ignition that moves the economy in overall.

Stagnant Interest Rates

When the interest rates are higher, the banks have extra incentives to provide the small businesses with loan. However, government shutdown could delay the increase. As a result, the banks could delay approval of loan requests and the small businesses would suffer more.

Economists said that it could take months or even years to return the momentum in the economy after a government shutdown. The effects could be more severe when the shutdown lasts longer. Therefore, let’s hope that the politician will never make such a decision.