c.2013 New York Times News Service
c.2013 New York Times News Service
Chris Leh, the owner of a fledgling manufacturing company in Ephrata, Pa., recently landed the kind of deal that growing companies dream about, with a major client whose order volume will triple his annual sales to around $1.5 million.
Because the new business requires a significant expansion of his production capabilities, Leh, 46, began hunting for additional employees and lining up financing to buy new equipment for his precision machine components company, TL Technologies. Last week, he was poised to close on a $1.5 million loan backed by the Small Business Administration.
Then the government shut down. Leh’s lender, Susquehanna Bank in Lititz, Pa., says it is prepared to cut a check — but cannot do it until the SBA and other government agencies reopen and process some final paperwork.
“We just missed the window, and now we’ve come to a complete standstill,” Leh said. “I have to go back to my customer and tell him I’m dead in the water and can’t fulfill his needs, and I can’t give him an answer when I can. It’s put me in the most horrible position as a business owner that you can be in.”
The Small Business Administration says it backs an average of $96 million in small-business lending each day. Having that financing stream frozen sets off a chain reaction of economic pain, said Anthony R. Wilkinson, who heads the National Association of Government Guaranteed Lenders, a trade group. “There are restaurants that aren’t being opened and contracts that aren’t being fulfilled,” he said. “As this drags on into Week 2, people are getting pretty worried.”
The toll may not be conspicuous yet in the broader economy, but at the local level the ripples are spreading. At many banks, direct small business lending is stalled too, because much of the Internal Revenue Service is closed, preventing lenders from checking tax information provided by applicants. Business owners are also grappling with the absence of other crucial government services, like E-Verify, the online system companies use to confirm the eligibility of prospective employees to work in the United States.
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The uncertainty all of this is the most maddening part, said Chris Mittelstaedt, 44, owner of The FruitGuys, a produce-delivery company in South San Francisco, Calif. Mittelstaedt spent part of last week fielding phone calls from customers of his company’s school distribution program, which is financed by federal grants.
Temporary funds came through at the end of the week, but he is frustrated by the confusion that he and his customers face. “If businesses are uncertain, they don’t spend,” he said. “That’s really bothersome for us and any growing company.”
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Leh, the manufacturer in Pennsylvania, is quick to trace out the ripple effects of his delayed financing. His prospective new client, of course, is kept waiting. So far, Leh said, the client is being patient and waiting along with him for the shutdown to be resolved. In addition, Leh has extended offers to two prospective employees, but he will not be able to bring them on until the loan closes.
Also waiting, he said, are “the guys that I’m buying the machines from, the guys who move the machines, the electricians that come in and wire things up, the insurance company I’m dealing with — all of those people aren’t getting paid right now.”
Last week, he intended to turn over a check for $57,000 to JBM Technologies, a machine-tool distributor based in nearby Ivyland that works with manufacturing companies throughout the mid-Atlantic region. The check, a down payment on the first machine Leh needs, would have gone to John Watkins, the owner of the 20-person company. Instead, the machine — a $300,000 Kitamura machining center about the size of a small room — is sitting idle on Watkins’ shop floor.
Watkins planned to have his staff begin work several days ago customizing Leh’s Kitamura. When the loan was delayed, Watkins scrambled to redeploy his employees. “We got busy at the right time with another project,” he said. “Without that, it would have been really bad.”
What irritates Watkins most about the standoff in Washington is that he sees it as a self-inflicted wound on an economy that was finally beginning to rebound. One of his clients is in negotiations with a Swedish financier about backing the transfer of a major manufacturing line from China to the United States. “We’re on the brink of getting people to invest, and then this,” Watkins said. “What does this look like? Who wants to invest in a country that goes through this?”
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The impact of the shutdown on some small businesses is obvious and direct. For example, Dee Ann Smith, 56, the owner of Discover Yosemite, a company that runs day tours through Yosemite National Park, estimates that she is losing $3,500 in ticket sales every day the park remains closed. The hourly employees who lead tours are not being paid, while the salaries for Smith’s office staff are eating into the cash reserves she had set aside to offset the slow winter season. The tour company has also stopped buying fuel for its buses from a local gas station, and packed lunches for its hikers from a nearby deli. “That’s 20 to 40 sales a day they’re missing out on,” she said.
For other businesses, the impact of the shutdown is more nuanced. In Lansdowne, Pa., Ari Miller, 37, is trying to build a food company, 1732 Meats. His creations — including jalapeño, black peppercorn and “garlic insanity” bacon — have done well at local farmers’ markets, and he wants to begin wholesale production for retailers.
But Miller needs U.S. Department of Agriculture certifications for every step of his expansion. While the agency’s meat inspectors are deemed essential employees and remain on the job, its packaging inspectors are not. Miller had a FedEx envelope stuffed with proposed bacon labels ready to send off for approval Oct. 1 — the day the government shut down. Until those labels are approved, he cannot get the agency’s green light to begin commercial operations.
“We have an investor, we have hard costs — we’re paying rent on our production kitchen even if we’re not using it — but we don’t have any way to generate revenue,” Miller said. The farmers’ market season ends this month, leaving him with no sales channel until he can get into stores.
He had hoped to ramp up in time for the holidays, but now he is watching that window start to close. Fifteen business days is the standard turnaround time for packaging approval, he said, but others in the industry have warned him that the Agriculture Department will be inundated when it finally reopens. “We’ve heard that you essentially have to add two to three days for every day they’re closed because of the backlog,” he said.
For many, that is the biggest concern — that, even after the government finally restarts, it could take weeks for the gears to unjam.
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Lynn Ozer, the president of Small Business Administration and government-guaranteed lending at Susquehanna Bank, has five clients, including Leh, waiting to close on loans. Many can be fast-tracked once the SBA reopens, but for those that require special handling, she worries about how long it will take the agency to dig out.
She is also braced for her loan business to dry up, especially with the Treasury Department expected to hit its debt ceiling around Oct. 17. The last time Congress had this kind of standoff, in August 2011, business confidence took a dive — and with it, Ozer said, went her clients’ willingness to borrow money to hire and expand.
Leh said he was monitoring the debt-ceiling fight in despair. “The thing that’s literally scaring me to death is this reckless behavior,” he said. “They’re going to drive the interest rates up. I’m on a 6 percent variable loan — if it goes up two points, that’s a huge impact for a business my size. And there’s nothing you can do. You just watch the madness continue.”
Ozer said she heard dozens of times each day from business owners with similar concerns, and it infuriated her. “Just as small entrepreneurs are willing to take some risks again, the government goes and begins to behave like irresponsible children,” she said. “They make decisions that adversely affect the economy, when it’s so fragile to begin with.
“The real tea party threw tea into the Boston harbor. These people are throwing businesses and people’s salaries.”