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Terry Gerton As we look back, the shutdown’s over now, but it lasted over a month and it really froze critical functions across every federal agency. From your vantage point, what were the most immediate and severe impacts on lenders and small businesses?
Dave Bohrman Well, Terry, I think that’s obviously a big question because there’s some latency in what those impacts will be. So some of that will come out in the days and weeks and months ahead. But looking at it very specifically, you also have to kind of consider what was the situation going into the government shutdown, and that kind of governs what actually those impacts will were or are going to be. So you have a highly volatile economy from a lot of uncertainty, whether that be from the tariffs or whether that be from tax policy, or whether that be from any of the agencies’ policies internally with respect to workforce. All of that kind of created a perfect storm with the political situation of the landscape in Washington; really made a real recipe for the government shutdown to happen. My question always was, once a government shutdown happens, how do we get out of it? And that what we witnessed. So as far as the impact, any small businesses that were looking to do any government-guaranteed lending, 7(a), 504 program within the SBA, that was frozen if their loan wasn’t already into some kind of post approval process. IRS, if you work for the IRS, you obviously know the story. The IRS is a completely different scenario. They went from 100,000 employees to 25% haircut to 75,000 employees and to about half of that were still in operation during the government shutdown this time. I’ve been around long enough, the first shutdown I was part of was 2013. That was pretty small, 13 days. But the last one was the historic one, 35 days. And at that point in time, the IRS was completely shut down. If you were doing anything with any kind of, you know, and “tax” is very broad … so whether you were a tax preparer or you were trying to get tax data or you were dealing with information reporting, there was zero access. This time you had a hybrid of access. So I would say the impact of anybody trying to get information or deal with the IRS, it was marginalized and confusing at best, but there was something happening. If you were looking for anything with the SBA, you were pretty much put on standstill, whether you were a lender or a small business trying to get a loan.
Terry Gerton Well let’s go back to the IRS for a minute, because you say there were folks working and there was some access but it was confusing and perhaps fragmented. Why is IRS data so critical to the lending process, and what impact did it have with a reduction in access to that data?
Dave Bohrman Well, that’s somewhat part of what we do as a business, is get taxpayer data over to commercial lenders or financial institutions that are using it to make a business decision. When it comes to the SBA, because it’s government-guaranteed and there is a taxpayer component to it, the government has very strict guidelines on how to underwrite a 7(a) or 504 loan, it’s governed by their SOP, their standard operating procedures. In that it actually requires tax data, one from the borrower, the borrower has to provide a tax return, and two — directly from, at an arm’s length — from the IRS in a tax return transcript to reconcile that information. And the reason that has to be reconciled is because it can sniff out fraud. If somebody misreports their income, we go to the IRS and we say, your income doesn’t match. Or it can shine a very big light on cash flow. A small business that’s making payroll tax deposits on average twice a week — that payment behavior is very indicative of their financial help. So being able to sniff out whether a business is paying their taxes on time or not is really a key data point for lenders to make a credit decision, whether it be yes or no. The SBA requires it, commercial lenders, some have it part of their credit policy, some do not. But it’s a real problem that we’re trying to solve or at least help lenders make better credit decisions.
Terry Gerton I’m speaking with Dave Bohrman. He’s the co-founder and vice president of marketing at Tax Guard. Let’s follow the thread then. The SBA was basically closed. So for 40-plus days, no one was getting an application submitted, no one was getting a loan approved. And you also mentioned the latency impact of that. Talk us through that. What’s going to happen now that SBA’s doors are back open?
Dave Bohrman Well, there’s the business side. Because it is a public-private partnership, the private end of it is basically most banks in America have an SBA lending program. That is the upstream pipeline of applications. So when we talk to commercial lenders, they were continuing to accept applications, process them internally and get them ready and packaged for SBA delivery. So what you expect to happen, what we’re seeing happen, is the SBA just said, “we’re open.” So now they have this backlog that they’re processing. So in the next couple of days to weeks, it’ll be interesting to see how that goes through the system so that the small businesses that are looking to be funded get funded as soon as they can.
Terry Gerton As you think about this funding lapse, would you say that it exposed any sort of systematic weaknesses both, for banks and borrowers? Was there anything because of the duration here that maybe needs to be specifically addressed?
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Dave Bohrman Well, that’s an interesting question because you because history will tell you something. In the past 25 years, since 2000, there’s really been three meaningful government shutdowns. So from a systemic planning process on the agency side and the federal government side, it’s probably a little bit out of bounds to kind of truly build anything into the system to account for a government shutdown. Similarly, on a business side, it’s hard to build a business process around something that happens so infrequently. So if you kind of look at the X and Y axes, it’s very damaging when it happens, but it happens very infrequently. So to answer the question, what systemic things will be changed, I can’t imagine much.
Terry Gerton As you look forward as the government gets back up to speed in these areas, are there ripple effects that you think lenders and small businesses should be looking out for? Do you expect any change in credit standards or compliance risks?
Dave Bohrman Absolutely. Kind of going back to the point of the hyper-dynamic nature and the hyper-volatile nature of the economy as it stands today, everything in the simplest form would be there’s the demand side, so small businesses that are looking for loans, and the supply side, which is the lenders that are giving the loans. So what we’ve seen since the beginning of this current administration, especially, because of the uncertainty and planning, the desire to take capital has been diminished. So the demand side has come down. And some of that — what are the interest rates going to be? Should I wait for a better interest rate? Some of that is, there’s tariffs that are impacting my business, I don’t know where that’s going to land. There are supply chain issues, I’m not sure what to do with those. So we’ve seen the demand side go down. And I think that … if you take the theme of certainty versus uncertainty and certainty driving small-business decisions, we’re still in an uncertain environment. The ripple effects of a government shutdown on top of all of those things add more uncertainty to the equation. I think we have some more, should we say, pain to work through before we get to a place of stability where we would see the credit markets kind of operate in some kind of normal fashion. But it is kind of hard to say what is normal. And on the credit side, creditors — their credit boxes have been getting tighter. The SBA underwriting requirements have increased since the Biden administration. So on the supply side, lenders are getting a little bit more frugal by which who they give money to. And on the demand side, small businesses are looking for credit less, which is impacting the overall economy.
Terry Gerton With the uncertain availability of government data, whether it’s tax data or economic data, do you see a trend for lenders especially to be looking for alternative sources of data as they consider what they’re going to do?
Dave Bohrman Absolutely. And we’ve been doing this since 2007, 2008. The general premise of tax data really isn’t about taxes. It’s really just about a database of small business or business or taxpayer information that is very rich. So when you think about the consumer, you or I, Terry, when we go get a car or we get a credit card, there’s a rich database, whether that’s the credit bureaus or all these kinds of reporting structures, that tells a lot of information about you or I as individuals. Businesses are under a completely different data regime and reporting regime, and they are governed by more usury laws, and that’s kind of based on the premise that small businesses or business in general — they should be left alone. So what that means is there are very little data requirements in the credit-data world for small businesses. So tax data, as we call it, or what we’re talking about payroll data or income data, all the things that live in an IRS database are very rich. It’s a very rich data pool by which lenders can look through. So we’re not the only ones doing this, there are people doing this. So to the point of tax data on any small business or even an individual can be very helpful in understanding who to give money to or who the good bets are, or maybe somebody that didn’t have enough data on them. Tax data tells the story that this is a compliant business and you should be able to give them funding. On the economic data, that that’s a little bit more broad. I know that during the shutdown, there was not a lot of data released. So that will be interesting to see how that plays out. And let’s just say we have a bad job report or gross domestic product, all the economic indicator reports that are going to come out over the coming weeks, that will be interesting to see how that rattles or ripples the credit markets.
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