But while small businesses fret, lawmakers in Washington show little sign of progress toward a deal to raise the nation’s debt ceiling with less than a month until the Treasury Department says it will risk running out of money. to pay all your bills. . President Joe Biden and congressional leaders met Tuesday in the Oval Office to discuss how to avoid a looming default crisis.
Democrats and Republicans have been deadlocked on raising the debt limit. Republicans say they are unwilling to increase it without major spending cuts, which Democrats say should not be related to America’s ability to meet its financial obligations.
The most direct consequence of a default for small businesses would likely be a significant pullback in bank lending in the chaos expected in financial markets. Banks would be less willing to lend to businesses, and any loans they issued would carry significantly higher interest rates, economists predict.
That lack of borrowing would prevent some businesses from covering short-term costs like payroll and force them to put longer-term expansion plans on hold, said Todd McCracken, president of the National Association of Small Businesses. Those whose income falls due to a government default would be less likely to be able to borrow money to stay afloat.
Businesses have already had trouble borrowing money after banks pulled loans following the collapse of Silicon Valley Bank and several other regional banks. TO small business survey published last week by Goldman Sachs found that 65% of small businesses believe they would be negatively affected by a default, and 77% said they were already worried about being able to get loans.
«There’s already a pretty significant credit crunch,» said Joe Wall, national director of Goldman Sachs 10,000 Small Businesses Voices. “We had interest rates go up, we had a crisis that swept through at least a handful of regional banks that affected lending to some degree, and the cumulative impact of that is obviously having a significant impact on the small business community. . . On top of that, they are still dealing with inflation that continues to rise and they are dealing with workforce challenges.”
McCracken said he is advising businesses to hold on to their cash to weather a default and to consider borrowing now while they can in case they need the money and credit markets to grind to a halt in the coming weeks.
“What companies should do is make sure they keep as much of their cash as possible and diversify where that cash is,” he said.
Some companies have also been considering postponing major business decisions amid uncertainty, which could have ripple effects throughout the economy if companies backtrack on hiring or expansion plans, he said.
Swierk has tried to put some contingency plans in place over the past three months, such as moving up the schedule to send invoices to the federal government for existing projects. He hopes to be able to access the company’s credit line to stay solvent, even though that would mean interest payments that could hurt the company in the long run.
If the government doesn’t pay its bills for even a week, 500,000 people could lose their jobs, according to projections released last week by the Congressional Budget Office and the Treasury Department. A default lasting more than three months would trigger a scenario similar to the Great Recession, with up to 8 million people losing their jobs and the stock market plunging 45%, the White House said last week.
Small businesses are most likely to be hit the hardest by a default, and are likely to feel the effects even before it occurs due to the restriction on lending by banks, an official with the Small Business Administration said. In 2011, when the US came close to default, small business banks pulled their loans even amid the threat of default and consumer confidence fell, the official said.
«A default for small businesses would be catastrophic,» the official said. «They would be among the first to feel the impacts, they would feel the pain before the big companies, and they would potentially feel a severe impact even in a near-default. That’s the lesson we have from 2011, that even getting very, very close to going down off the cliff can cause ripples throughout the economy that are not easy to recover from quickly.
The official said that small businesses, which are more likely to rely on their incoming revenue to pay their employees each week, could face a perfect storm of events due to a default in which their sales would fall at the same time that banks would be less willing to lend money to help them cover the losses.
But despite the catastrophic consequences, the broader business community has been relatively quiet when it comes to urging Congress to reach a deal. Few major CEOs have spoken publicly on the issue, and corporate America has failed to fund major ad campaigns to stoke concern among the public.
For small businesses, lobbying Congress has largely fallen by the wayside amid more pressing daily fights, said Swierk, who has been involved in small business advocacy issues through the Goldman Sachs 10,000 Small program. Business Voices. She said she recently spoke with the office of Sen. Dick Durbin, D-Ill., about her concerns.
“We are, like, herding cats. The challenge for independent businesses lobbying for ourselves is that we are so busy working the business that we literally don’t have time,” he said. «So some business owners feel like they don’t have a voice on Capitol Hill.»
McCracken said that at the same time, there is also a level of «crisis fatigue» among companies after three volatile years and repeated threats by lawmakers of impending closures and defaults over decades.
“There’s the whole ‘boy who cried wolf’ phenomenon,” he said. «But sometimes there really is a wolf.»