U.S. President Joe Biden with House Speaker Kevin McCarthy (R-CA) hosts debt ceiling talks in the Oval Office at the White House in Washington, May 22, 2023.
Leah Millis Reuters
Politicians often like to say that small businesses are the engine of the economy, but if that’s the case, the Republican-led House and Biden administration’s high-pressure poker game over the debt ceiling is causing a big problem. .
And uncertainty about what should be most certain — that the U.S. government will repay its debt — comes on top of an already strained economic climate for Main Street entrepreneurs.
“Small business owners are worried right now,” said Asahi Pompeo, Goldman Sachs Foundation’s head of global corporate engagement and president, at a recent CNBC Small Business Playbook virtual event. “You’re hearing about the credit crunch, rising inflation. You’re hearing about the loss of the debt ceiling. It’s a scary time, and it’s confusing and challenging for small business owners.”
The warning from credit rating agency Fitch came on Thursday in debt ceiling negotiations between the White House and congressional Republicans, just seven days before the U.S. faces the threat of a debt default, but a deal was reached. It’s close on Friday and the market is close as investors feel that the risk is waning.
Models suggest a default would be devastating to markets and the economy, and a majority of small business owners (90%) want the government to avoid debt defaults, according to a recent Goldman Sachs 10,000 Small Business Voices survey. The survey results from small business owners are notable for the highly politicized nature of the battle in Washington, D.C., a community that consistently skews conservative in demographics and political views.
How bad can it be? A 2013 estimate from federal economists predicted a 30% drop in the stock market, a 10% drop in the value of the dollar and a “mild” two-quarter recession before the debt ceiling showdown. But in the interim, millions of jobs are still likely to be lost and real GDP will take a big hit, according to the Brookings Institution.
The first to face the brunt of this financial crisis are the small businesses that are paid directly by the federal government through government shutdowns in recent history. But for all small businesses, the debt crisis exacerbates an already fraught environment for growth, fueled by the biggest Fed rate hikes in decades and a regional banking crisis that has made lenders more conservative with new loans.
Main Street is struggling to get credit.
According to the Small Business and Entrepreneurship Council, nearly half (44%) of small business owners are experiencing “negative effects” on their ability to get credit. This is consistent with data from a recent CNBC|Momentive Small Business Survey in which owners say they have lost confidence in banks because of the banking crisis, and more than half say it’s not easy for them to do so. access capital to operate.
65 percent of small businesses believe that if the debt ceiling is not lifted, it will be negatively impacted, according to a Goldman study, primarily by reducing access to capital.
In the year In April 2022, Goldman Sachs found that 77 percent of small business owners are confident in their ability to access capital. But, last April, it found a complete reversal, with the same percentage now worried about access to capital.
“Small businesses depend on small banks. And we can’t forget that the banking crisis and risk in the last few months is creating some concerns about whether small businesses can get capital.” said Pompey.
With limited opportunities for financing, small business owners face high interest rates — rates higher than double-digit percentage rates for many business loans due to the Fed’s aggressive monetary policy. in a year.
“Obviously, small business owners are trying to walk a tightrope. They want inflation to go down, but obviously they don’t want to pay more to get capital,” Pompey said.
Small business moves into an uncertain economy.
What small businesses can do is prepare for the economic uncertainty ahead. Control what you can control — that is, not the debt ceiling talks — and for Pompey, that means improving financial relationships and financial literacy. In fact, even if a deal is reached, it is expected to last only two years and unless the political parties agree on a solution to this issue for good, another debt ceiling crisis may return soon. Small business owners should take steps now to build a regular and consistent business practice in the face of future economic uncertainty.
At a recent CNBC small business event, Pompeo gave four key steps small business owners should take in the current economic climate.
1. Before looking for a bank
When it comes time to get funding, bankers want to know who their small business customers are and how to better understand the business and the impact it’s making in their local communities. But that can’t happen if small business owners don’t proactively manage that relationship before they make money.
“The worst time to meet a banker is when you need capital,” Pompey recalled a small business owner advising her.
When the time comes to get financing, it’s important to know your banker and have a solid relationship with them, Pompey said. Calling your banker and updating them on what’s going on with your business are small efforts that can go a long way if the economy takes a turn for the worse.
If the relationships are not maintained, they should be re-established and it is important to get in the habit of communicating regularly with the bank, which will allow the owners to share timely updates on the status of the business.
2. Go deeper into your numbers
Pompey said she often hears that small business owners feel somewhat uncomfortable when it comes to their finances. She suggests owners take a few days to really assess their numbers, which, while uncomfortable, can help them feel more empowered during this uncertain time.
“The No. 1 thing that comes back to bite business owners later is something hidden in their numbers that they haven’t taken the time to look at,” she says.
“It’s the first step to start going through your numbers, which can be uncomfortable and time-consuming. Your business instead of entering Your business,” she added.
3. Know your customer
While dealing with finance in a slowing economy can be stressful, it’s the fun part of the business, Pompey said. When small business owners understand their customers’ profiles and put themselves in their customers’ shoes, they can lean on how to best adapt their businesses to meet customers’ needs.
4. Build a small business network
Pompey said she hears one thing over and over from small business owners: loneliness. As a result, access to appropriate support as well as opportunities to collaborate and share strategies or business programs are critical to success.
“Tap the best of your small business,” she said.