The US is careening towards a debt crisis the likes of which we haven’t seen since 2011 when Barack Obama faced off against the Tea Party. No one knows for sure if the federal government is going to default on its debt by the end of this month. But if Democrats and Republicans can’t agree on a compromise, it will have an enormous impact on small businesses around the country.
Some 65% of small businesses believe they would be negatively affected by a default, according to a recent report from Goldman Sachs. This is very bad news. Small businesses accounted for 45% of all private-sector jobs in the first quarter of 2022.
The first small businesses that will be affected will be those that contract directly with the federal government. Tens of thousands of small businesses received more than $154bn in federal contracts in the fiscal year 2021 – about 27% of all government contract spending that year. And this doesn’t include the small businesses that indirectly received funding from larger construction and other firms that get government money and sub-contract out work to them. If Janet Yellen is forced to prioritize interest and debt payments above all else, then these federal contracts would be suspended and the negative cash flow impact on these small firms would be substantial. Let’s remember: almost half of small businesses have less than three months of cash on hand.
Then there are the small businesses that service government properties. A report from the Cato Institute estimates that the federal government owns or leases more than 350,000 buildings and properties around the country. These facilities are a critical revenue source for countless small firms that perform construction, maintenance, security, cleaning, electrical, landscaping and other kinds of services, all which would be potentially interrupted. The employees that go to these buildings every day rely on neighboring businesses for their lunches, dry cleaning, yoga, happy hours and other products and services. If ordered to stay home, these businesses – already reeling from the number of employees now working remotely – would suffer a significant blow.
Then there are government functions. Individuals and small business owners rely on many areas of the government for services. They’re applying for passports, questioning the IRS, waiting on regulatory approval and loan guarantees from the Small Business Administration. These and many other critical government services could be suspended if funding is re-directed.
These are all immediate effects of what would happen if the government must avoid a loan default. The longer-term effects are even more devastating. If the situation persists credit and financial markets will be volatile and banks will be forced to limit financing to only the most secure (and usually) largest of their customers, which means many small businesses seeking loans will either have to wait or be denied. The Goldman Sachs study found that 77% of small business owners they surveyed were already concerned about their ability to get loans.
According to the White House, a default lasting more than three months would cause a significant recession with as many as 8 million people losing their jobs. The stock market – where small business owners park a significant amount of their retirement savings and collateral – could collapse.
All of this could not come at a worse time for small businesses. Optimism among business owners – as determined monthly by the National Federation of Independent Businesses – is already at a 10-year low. Bankruptcies are ominously on the rise too, with one research firm reporting a 20% increase in filings from a year ago. An extended shutdown would make these numbers much worse.
If you’re a small business owner, what can you do?
It sounds obvious but it’s a fact that my very best clients are always thinking ahead. So the first thing you should be doing is preparing. A federal default or shutdown may not happen at all, but that doesn’t mean you shouldn’t be ready for such an event by the end of this month.
That means hoarding cash, confirming your credit availability (including credit cards) and communicating with your customers, suppliers, employees and partners. No one should be surprised by your actions – like delaying payments – if a shutdown occurs. They should know that this is something you may be forced to do and they should know this well in advance. The more you tell them of your plans the better they can also plan and the more appreciative they will be.
Also, and this is probably no consolation for businesses right now, is to take away an important lesson: diversity is important. If your business relies too much on any one customer (ie the federal government) then once this problem is behind us you should be making it a priority to diversify your customer base. Too much dependence on one source of revenue is too big a risk and even the federal government can’t be relied on to pay its bills on time – or at all.
The silver lining in this dangerous, avoidable situation is that it would take time for things to get really, really bad. Although Yellen warns of a default by the end of May, she does have options for at least funding major parts of the government. And quarterly tax payments – expected by mid-June – could help stave off disaster for a while longer. But none of this should stop a business owner from thinking about the consequences now and preparing for this event. Even if we escape this time, given the acrimonious environment in Washington, we shouldn’t be surprised if something like this doesn’t occur again – and soon.
