How bad could it get? A 2013 estimate from Fed economists undertaken given a prior debt ceiling showdown projected a 30% decline in the stock market, a 10% drop in the value of the dollar, and a “mild” two-quarter recession. 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 face the blows of this potential financial crisis will likely be small businesses that are paid directly by the federal government through contract work, which has happened in government shutdowns in recent history. But for all small businesses, already under the strain of a credit crunch that began with the biggest Fed rate increases in decades and a regional banking crisis that has made lenders much more conservative with new loans, a debt default would worsen an already deteriorating environment for growth.
Main Street already struggling to access credit
Almost half (44%) of small business owners already are experiencing “negative effects” in their ability to access credit, according to the Small Business & Entrepreneurship Council. And that matches the data from the recent CNBC|Momentive Small Business Survey which found owners saying they had lost confidence in banks as a result of the banking crisis, and even more to the point, almost half said it isn’t easy for them to access capital to operate.
Sixty-five percent of small businesses believe they will be negatively impacted if the debt ceiling is not raised, according to Goldman’s surveying, and most prominently through reduce access to capital.
In April of 2022, Goldman Sachs found that 77% of small business owners were confident in their ability to access capital. However, this past April, it found a full reversal, with the same percentage now worried about access to capital.
“Small businesses rely on small banks. And so we can’t overlook the fact that the banking crisis and concern over the last several months is driving some of that concern by small businesses about whether they’ll be able to really access capital,” Pompey said.
Along with the limited opportunities to obtain funding, small business owners would also face higher interest rates — even higher than rates that have already hit double-digit percentages for many business loans due to the Fed’s aggressive monetary policy that took rates from zero to 5% in a year.
“It’s a bit of a tightrope really that small business owners are trying to navigate. They want inflation to go down, but obviously they don’t want to have to pay more to access capital,” Pompey said.
Small business moves for an uncertain economy
All small businesses can do is prepare for the economic uncertainty that lies ahead. Control what they can control — i.e. not the debt ceiling talks — and Pompey says that means shoring up financial relationships and financial knowledge. In fact, even if a deal is reached, it is expected to only cover two years, and unless the political parties agree on a fix to make this issue go away for good, another debt ceiling crisis could be back before long. The moves small business owners should make now are ones that should be built into a regular, permanent business practice in advance of what are sure to be future economic uncertainties.
Pompey provided four key steps that small business owners should be taking in the current economic environment at the recent CNBC small business event.
1. Bank before you need it
When it comes time to access funding, bankers want to be able 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 aren’t proactively managing that relationship before they actually need money.
Pompey recalled a small business owner advising her that “the worst time to meet a banker is when you need capital.”
It’s critical to know your banker and have an established connection with them in case there comes a time where you need to access funding, 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.
That relationships needs to be re-established if its not been maintained, and then it is important to get in the habit of communicating on a regular basis with a bank, which also allows owners to share timely updates on business milestones.
2. Go deep into your numbers
Pompey said that time and time again she hears that small business owners feel a degree of discomfort when going into their financials. She suggested for owners to take a few days to really review their numbers, which will make them feel more empowered in this time of uncertainty even if it’s uncomfortable.
“The No. 1 thing that comes back to bite business owners later on tends to be something hiding in their numbers that they didn’t take the time to look at,” she said.
“Taking that time, which can be uncomfortable, to really go through your numbers is the first step to working on your business instead of in your business,” she added.
3. Know your customer
While coming face-to-face with financials in a slowing economy may be stressful, this is the fun part of the business, Pompey said. When small business owners understand their customer profiles and put themselves in the customers’ shoes, they can lean in on how to best adjust and pivot their businesses to meet the needs of customers.
4. Build a small business network
Pompey said that she hears over and over again from small business owners one thing: it’s lonely. As a result, having the proper support as well as opportunities to collaborate and share strategies or business programs are critical to success.
“Tap into your small business besties,” she said.
This content was originally published here.
