Right-wing House Republicans engineered a shutdown of the federal government, by demanding that the Democratic Senate approve a spending bill that would have delayed the implementation of the Affordable Care Act, a demand they knew would not be accepted. Non-essential government activity ceased as of midnight this morning. It's the first such closure of the U.S. government in nearly two decades.
Global markets fell and business owners reacted with anger and alarm. The legislative impasse threatens the fragile economic recovery and could set the stage for a potentially catastrophic default on U.S. Treasury debt later this month.
"This is an absolutely outrageous scenario enabled by inept lawmakers who are bogged down in their own private and unnecessary [interests]," says Larry Miller, founder and chief executive of BNL in Lovettsville, Virginia, which provides systems engineering and program management to the Departments of Defense, Treasury, and the Veterans Administration, among other agencies.
Bracing for Weeks Without their Biggest Customer
Miller's BNL, which is No. 391 on the Inc. 500 this year and has had a three-year compound annual growth rate of more than 1,000 percent, and $6 million in revenue in 2012, prepared for a shutdown that could last as long as a month. Miller reached out to his 55 employees weeks ago and told them that they will not be laid off or furloughed, and that he will do what it takes to get through the tough times.
Miller will offer employees time off, or the option to redeploy to work on project infrastructure, such as process engineering and documentation, updating the process documentation library, and maintaining reference data and materials.
Practically, that means Miller has to continue paying salaries, health care costs that amount to about $1,200 per employee per month, and other benefits at a time when revenue is not flowing.
"Most of our contracts are fixed-price cost accounting standard," Miller says. "There is a high risk we won't recover the cost."
Some Entrepreneurs Stalling Hiring Already
The budget crisis and looming government shutdown will likely force Michael Lin, owner and chief executive of LinTech Global, to put off hiring an employee he wanted to start October 1.
LinTech, of Farmington Hills, Michigan, does enterprise software consulting, systems integration, and help desk and network support for federal agencies as well as commercial entities, is No. 412 on the Inc. 500 list. It had revenue of nearly $3 million in 2012, and has experienced a compound annual growth rate higher than 1,000 percent in the last three years. He was expecting a new federal contract to get signed this month, but that's now in limbo.
"We may have to delay hiring . . . until the project gets the green light," Lin says, adding that, luckily, most of his other projects have already been funded for the year.
More than anything, Lin says he is dismayed by the budget crisis. "By now I am used to this, but it seems to happen every year with the debt ceiling or the government shutdown, it is always in discussion and we have to play it as we go and adjust our strategy," he says.
Razor-Thin Margins Only Getting Thinner
For her part, Joni Green, founder and chief executive of Five Stones Research in Brownsboro, Alabama, says the government shutdown will dramatically affect her business this year. Like Miller, the costs for her contracts are fixed.
"This will put us in negative profitability mode," Green says. "If we ran the business like the government, we would long ago have shut down."
Green, whose company is No. 421 on the Inc. 500 list for 2013, has 51 employees and had revenue of more than $5 million in 2012. Though the company also had a compound annual growth rate of more than 1,000 percent in the past three years, Green thinks her $9 million revenue forecast for 2013 may drop.
Green, whose company provides engineering, logistics, and information management to the Airforce, Army, and Navy, says the sequester from earlier this year has already forced her to operate on razor thin margins.
"We have been driven by the budget cuts and cost slashing so much this past year that the management reserves on our contracts are minimal," she says.
Green says 13 of her contracts, or 80 percent of the total, will be delayed by a government shutdown. Five Stones Research also bills on a monthly basis for the prior month, which could hurt its accounts receivable collections for months, particularly if the shutdown lasts for several weeks or more.
She adds that uncertainty about the debt ceiling, the budget crisis, and lingering questions about pricing for health care next year are like neon blinking question marks making it next to impossible to budget, which the company usually does three years out.
The uncertainty interfered with Green's hiring plans, too.
"We are only hiring if absolutely necessary," Green says. "I would have thought by this time this year, we would have hired three more [employees]."
The Longer-Term Implications
Economic experts say the government shutdown could haunt small businesses and their growth prospects for years to come.
In the future, owners seeking funding from bankers or investors will have to explain why they weren't able to meet their budget expectations.
"When you have a funding event, you have to talk about your history and you cannot just use the excuse of the government, because everyone knows it is harming everyone and it just ends up looking bad for entrepreneurs," Laura Gonzalez, professor of finance and business economics at Fordham, says.
BNL's Larry Miller concurs. Speaking as if the shutdown were already a foregone conclusion, he says: If we were able to avoid a shutdown, "we would have been ahead of valuation, and our EBITDA would have been much higher, and banks would have been happier," he adds.