Debt Ceiling Risk The Banking Moves Every Small Business Should Make

Politicians often like to say that small business drives the economy, but if that’s the case, the high-stakes debt ceiling poker game being played by the Republican-led House administration and Biden faces a major dropout.

And uncertainty about what is supposed to be most certain of all – the US government paying its debt – adds to what is already a tough economic environment for Main Street entrepreneurs.

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

A US debt warning from credit rating agency Fitch added new urgency to ongoing debt ceiling negotiations between the White House and congressional Republicans on Thursday, with just seven days to go before the US United did not face the threat of a default, but a deal was apparently close on Friday and the market rallied as investors bet the threat was receding.

The models suggest a default would cause serious damage to markets and the economy, and the vast majority of small business owners (90%) want the government to avoid a default, according to a recent Goldman Sachs 10,000 Small Business Voices survey . With the battle in Washington, DC highly political, the results of the survey of small business owners are remarkable given that this is a community that consistently skews conservatives in demographic makeup and political views.

How bad could this get? A 2013 estimate by economists at the Enterprise Fed given a prior debt ceiling showdown predicted a 30% decline in the stock market, a 10% decline in the value of the dollar, and a “mild” recession of two quarters. But mild still likely means millions of jobs would be lost and real GDP would take a big hit, according to the Brookings Institution.

The first to take the brunt of this potential financial crisis will likely be small businesses that are paid directly by the federal government through labor contracts, which has happened during government shutdowns in recent history. But for all small businesses, already under pressure from a credit crunch that began with the Fed’s biggest rate hikes in decades and a regional banking crisis that has made lenders much more conservative with new lending. , a default would aggravate an already deteriorated environment for growth.

Main Street is already struggling to access credit

According to the Small Business & Entrepreneurship Council, nearly half (44%) of small business owners are already experiencing “negative effects” in their ability to access credit. And that lines up with data from the recent CNBC | Momentive Small Business Survey which found owners said they had lost confidence in banks as a result of the banking crisis, and specifically, nearly half said it was not easy for them to access capital to work.

According to the Goldman survey, 65% of small businesses believe they will be negatively impacted if the debt ceiling is not raised, especially by reducing 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 he saw a complete reversal, with the same percentage now worrying about access to capital.

“Small businesses depend on small banks. So we can’t ignore the fact that the banking crisis and the worries of the past few months are driving some of the concern among small businesses about whether they will actually be able to access capital,” said Pompey.

In addition to the limited opportunities to obtain financing, small business owners would also face higher interest rates – even higher than rates that have already reached double digit percentages for many business loans due to of the Fed’s aggressive monetary policy, which took rates from zero to 5% in one 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 have to pay more to access capital,” Pompey said.

Small businesses operate in an uncertain economy

All small businesses can do is prepare for the economic uncertainty that awaits them. Control what they can control — that is, not debt ceiling talks — and Pompey says that means building financial relationships and financial literacy. In fact, even if an agreement is reached, it should only cover two years, and unless the political parties agree on a solution to make this problem go away for good, another debt ceiling crisis could come back. shortly. The steps small business owners should take now are ones that should be incorporated into regular and ongoing business practice in anticipation of what will certainly be future economic uncertainties.

Pompey provided four key steps small business owners should take in today’s economic environment at the recent CNBC Small Business event.

1. Bank before you need it

When it comes to accessing finance, bankers want to be able to find out who their small business clients are and how to better understand the business and the impact they are having in their local communities. But that can’t happen if small business owners don’t proactively manage that relationship before they actually need the money.

Pompey recalled the small business owner telling him that “the worst time to meet a banker is when you need capital.”

It’s essential to know your banker and have an established connection with them in case you need to access funding, Pompey said. Calling your banker and letting them know what’s going on in your business are small efforts that can go a long way if the economy turns sour.

These relationships need to be restored if they are not maintained, and then it is important to form the habit of communicating regularly with a bank, which also allows owners to share timely updates on project milestones. business.

2. Go deeper into your numbers

Pompey said she hears time and time again that small business owners feel some discomfort when getting into their finances. She suggested homeowners take a few days to really review their numbers, which will make them more self-sufficient in these uncertain, albeit uncomfortable, times.

“The #1 thing that comes back later to bite business owners tends to be something lurking in their numbers that they haven’t taken the time to look at,” she said.

“Taking this time, which can be uncomfortable, to really go over your numbers is the first step to working on your business rather than your business,” she added.

3. Know your customer

While coming face-to-face with financiers in a slowing economy can be stressful, that’s the fun part of the business, Pompey said. When small business owners understand their customer profiles and put themselves in their shoes, they can think about how best to adjust and pivot their businesses to meet customer needs.

4. Build a small business network

Pompey said she hears one thing over and over again from small business owners: It’s loneliness. Therefore, having the right support as well as opportunities to collaborate and share business strategies or programs are critical to success.

“Draw from your small business best friends,” she said.