The fear of the debt ceiling has a lasting message for small businesses

U.S. President Joe Biden hosts debt limit talks with Speaker of the House Kevin McCarthy (R-CA) in the Oval Office at the White House on May 22, 2023 in Washington.

Leah Millis | Reuters

Politicians are often fond of saying that small businesses are the engine of the economy, but when that’s the case, there’s a risk that the high-risk debt-ceiling poker game being played by the Republican-led House and Biden administration is stalling .

And uncertainty about what should be safest — the US government paying off its debt — is adding to the already tight economic environment for Main Street entrepreneurs.

“Small business owners are nervous right now,” Asahi Pompey, global head of corporate engagement and president of the Goldman Sachs Foundation, said at the recent CNBC Small Business Playbook virtual event. “You hear a credit crunch, rising inflation. You hear a debt ceiling failure. This is a scary time that is somewhat confusing and challenging for small business owners.”

A warning from the rating agency Fitch about the US debt on Thursday gave new urgency to the ongoing debt ceiling negotiations between the White House and Republicans in Congress. Just seven days to go before the United States defaults, but a deal was reportedly close on Friday and the market rallied as investors bet the threat would ease.

Models suggest that a default would cause serious damage to markets and the economy, and the vast majority of small business owners (90%) want the government to prevent a default, according to a recent Goldman Sachs 10,000 Small Business Voices survey . Because the struggle in Washington, DC is highly political, the polling results among small business owners are notable for a community that has consistently conservative biases in its demographics and political views.

How bad could it get? A 2013 estimate by Fed economists, based on a previous debt ceiling showdown, projected a 30% fall in the stock market, a 10% fall in the dollar and a “mild” two-quarter recession. But mild development still means millions of jobs would be lost and real GDP would take a big hit, according to the Brookings Institution.

The first to grapple with the effects of this potential financial crisis are likely to be small businesses paid directly by the federal government through contract labor, which has been the case in recent history with government shutdowns. But for any small business already reeling from a credit crunch that began with the Fed’s biggest rate hike in decades and a regional banking crisis that has made lenders much more conservative about new lending, a debt default would do that anyway deteriorated environment will worsen growth.

Main Street is already struggling to get credit

According to the Small Business & Entrepreneurship Council, nearly half (44%) of small business owners are already experiencing “negative impacts” on their access to credit. And that aligns with data from the most recent CNBC|Momentive Small Business Survey, in which owners said they had lost confidence in banks as a result of the banking crisis, and more importantly, nearly half said it wasn’t easy for them Access to capital for operations.

According to a Goldman survey, 65 percent of small businesses believe they will be negatively impacted if the debt ceiling is not raised, primarily through restricted access to capital.

In April 2022, Goldman Sachs found that 77% of small business owners were confident in their ability to access capital. However, last April saw a complete reversal and the same percentage now worried about access to capital.

“Small businesses depend on small banks. So we can’t overlook the fact that the banking crisis and the worries of the last few months among small businesses are leading to some concerns about whether they will really have access to capital,” Pompey said.

Along with limited financing options, small business owners would also face higher interest rates — even higher than interest rates, which have already reached double-digit percentages on many corporate loans due to the Fed’s aggressive monetary policy, which has raised interest rates from zero to 5%. in a year.

“It’s really a kind of balancing act that small business owners are trying to walk. They want inflation to go down, but of course they don’t want to have to pay more to access capital,” Pompey said.

Small businesses are moving to an uncertain economy

All small businesses can do is prepare for the coming economic uncertainty. Control what they can control — not the debt ceiling talks — and Pompey says that means strengthening financial ties and financial literacy. Even if an agreement is reached, it is expected to last only two years, and unless the political parties agree on a solution to finally resolve this issue, a renewed debt ceiling crisis could shortly ensue. The steps small business owners should take now should be incorporated into regular, ongoing business practice in advance of future economic uncertainties.

At the recent CNBC small business event, Pompey presented four key steps small business owners should be taking in the current economic environment.

1. Bank before you need it

When it comes to accessing financing, bankers want to know who their small business customers are and how to best understand the business and the impact they are making in their local communities. But that can’t happen if small business owners don’t proactively manage that relationship before they actually need money.

Pompey recalled a small business owner telling her, “The worst time to meet a banker is when you need capital.”

“It’s important to know your banker and have an established connection with them if you ever need access to finance,” Pompey said. Calling your bank advisor and updating them on the status of your business are small efforts that can go a long way when the economy takes a turn for the worse.

These relationships need to be restored if not maintained, and then it is important to get used to communicating with a bank on a regular basis, which also allows owners to communicate business milestones in a timely manner.

2. Dig deep into your numbers

Pompey said she keeps hearing small business owners feel a certain uneasiness when dealing with their finances. She recommended that owners take a few days to really check their numbers so they can feel empowered during this time of uncertainty, even if it’s uncomfortable.

“The main problem that comes to mind for business owners later is usually something hidden in their numbers that they haven’t taken the time to address,” she said.

“Taking the time, which can be uncomfortable, to really go through your numbers is the first step to working on your business, not your business,” she added.

3. Know your customer

While dealing with finance personally in a slowing economy can be stressful, it’s the fun part of the business, Pompey said. By understanding their customer profiles and putting themselves in their shoes, small business owners can figure out how best to customize and align their business to meet customer needs.

4. Build a small business network

Pompey said the one thing she always hears from small business owners is that it’s lonely. Therefore, the right support and opportunities to collaborate and share strategies or business programs are critical to success.

“Meet your best friends in small businesses,” she said.


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