Debt ceiling risk banking actions every small business needs to do

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

Leah Millis | Reuters

Politicians often like to say that small business is the engine of the economy, but if so, the high-stakes poker game over the debt ceiling being played by the Republican-led House of Representatives and the Biden administration risks a major shutdown. .

And more than anything else, the uncertainty over what’s certain—that the U.S. government will pay off its debt—comes on top of an already tough economic environment for Main Street entrepreneurs.

“Small business owners are nervous right now,” Asahi Pompey, global head and president of corporate affairs at Goldman Sachs Foundation, said at the CNBC Small Business Playbook virtual event. “They’re hearing about the credit crunch, rising inflation. They’re hearing about the debt ceiling default. It’s a scary time and it’s a bit confusing and difficult for small business owners.”

Credit rating agency Fitch’s warning on US debt added new urgency to ongoing debt ceiling talks between the White House and congressional Republicans on Thursday, just seven days before the US faces the threat of a debt default, but a deal was reached. The market rallied as it closed on Friday and investors argued that the threat had receded.

According to a Goldman Sachs survey of 10,000 Small Business Voices, models show that a default would severely damage markets and the economy, and that the vast majority (90%) of small business owners want to avoid a government debt default. With political competition high in Washington, the results of the survey of small business owners are noteworthy because it is a community that has consistently skewed conservative in demographics and political views.

Former NEC director Brian Deese: Setting the debt ceiling high can have long-term negative effects

How bad could it be? Fed economists estimated in 2013 that a 30% drop in the stock market, a 10% drop in the value of the dollar and a two-quarter “soft” recession were predicted, given the previous showdown on the debt ceiling. According to the Brookings Institution, moderate still means millions of jobs will be lost and real GDP will take a big hit.

The first to feel the brunt of this potential financial crisis are likely to be small businesses paid directly by the federal government for contract jobs that have occurred during recent government shutdowns. But a credit crunch that began with the Fed’s biggest rate hike in decades and a regional banking crisis that has made lenders more conservative with new loans, a debt default will worsen an already deteriorating environment for all small businesses. increase.

Main Street is already struggling to get credit

According to the Small Business and Entrepreneurship Council, almost half (44%) of small business owners are already experiencing “adverse effects” on their access to credit. And that’s consistent with data from a recent CNBC|Momentive Small Business survey in which owners say they’ve lost confidence in banks as a result of the banking crisis, and more than half say it’s not easy for them. access to capital to operate.

According to Goldman’s survey, 65 percent of small businesses believe they will be adversely affected by not lifting the debt ceiling and, most importantly, by reducing access to capital.

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

“Small businesses rely on small banks. So we can’t ignore the fact that the banking crisis and anxiety over the last few months has fueled some of the anxiety that small businesses have about whether they really have access to capital.” Pompey said.

In addition to limited access to financing, small business owners will also face higher interest rates—higher than the rates that have already hit double-digit rates for many business loans due to the Fed’s aggressive monetary policy of zero to 5%. in a year.

“It’s really a bit of a tightrope that small business owners are trying to navigate. They want inflation to come down, but obviously they don’t want to pay more to access capital,” Pompey said.

Small businesses are moving into an uncertain economy

All small businesses can do is prepare for the economic uncertainty ahead. Control what they can control — that is, not the debt ceiling debate — and Pompey says that means strengthening financial attitudes and financial literacy. In fact, even if a deal is reached, it is expected to cover only two years, and another debt ceiling crisis could return before too long unless the political parties agree on an amendment to end the issue once and for all. The actions small business owners need to take now are steps that should become regular, ongoing business practices before the economic uncertainties ahead.

Pompey presented four key steps small business owners should take in the current economic climate at a recent CNBC small business event.

1. Bank before you need it

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

“The worst time to see a banker is when you need capital,” Pompey recalled a small business owner advising him.

If the time comes when you need financing, it’s important to know and connect with your banker, Pompey said. Calling your banker and updating them on what’s happening in your business are small efforts that can go a long way if the economy takes a turn for the worse.

If the relationship is not maintained, it should be rebuilt and then it is important to get into the habit of communicating regularly with the bank, which allows owners to share timely updates on business milestones.

2. Go deep into your numbers

Pompey said that from time to time, he hears that small business owners feel some level of anxiety when it comes to their finances. She suggested owners take a few days to really review their numbers, which, even if it’s uncomfortable, will make them feel stronger during this period of uncertainty.

“The No. 1 thing that comes back to bite business owners later is something hidden in their numbers that they didn’t take the time to look at,” he said.

“Taking that time to go over your numbers is the first step to working on what you might worry about. your work instead your business,” he added.

3. Know your customer

Pompey said that while dealing with finances in a slowing economy can be stressful, it’s also the fun part of the job. When small business owners understand their customer profiles and put themselves in their customers’ shoes, they can think about how best to adjust and orient their business to meet their customers’ needs.

4. Build a small business network

Pompey said he hears one thing over and over from small business owners: it’s lonely. Consequently, having the right support, as well as the ability to collaborate and share strategies or business programs, is critical to success.

“Tap your small business friends,” he said.

The current state of Main Street in America

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