How a U.S. Default Could Ruin Small Businesses and What to Do About It
The U.S. government is on the brink of a historic default that could have devastating consequences for the economy and millions of small businesses across the country. A new report by the Senate Small Business Committee reveals how a failure to raise or suspend the debt ceiling by June 1 could trigger a cascade of financial shocks that would hurt small businesses’ access to credit, cash flow, supply chains, and consumer demand.
The debt ceiling is a cap on the total amount of money that the U.S. can borrow to pay its bills, such as Social Security benefits, military salaries, interest on the national debt, and tax refunds. The U.S. hit its debt limit of $31.4 trillion on Jan. 19 and has been using accounting maneuvers to avoid defaulting on its obligations. However, Treasury Secretary Janet Yellen has warned that these measures could run out by June 1, leaving the U.S. unable to pay all of its bills.
If Congress does not act to raise or suspend the debt ceiling before then, the U.S. would face an unprecedented situation where it would have to prioritize some payments over others, creating uncertainty and instability in the financial markets. According to the Senate report, this could have dire implications for small businesses, which account for nearly half of the U.S. GDP and employ over 60 million workers.
Some of the potential impacts of a default on small businesses include:
Reduced access to credit: A default would likely cause interest rates to spike and credit markets to freeze, making it harder and more expensive for small businesses to borrow money for their operations and investments. The report cites a study by the Federal Reserve Bank of New York that found that a one percentage point increase in interest rates could reduce small business lending by $20 billion per year.
Delayed payments: A default would also disrupt the flow of payments from the federal government to small businesses that provide goods and services to federal agencies or receive grants or contracts from them. The report estimates that the federal government owes about $100 billion to small businesses at any given time, and any delays in these payments could cause cash flow problems and force some businesses to lay off workers or close down.
Disrupted supply chains: A default would also affect the global trade and commerce that many small businesses rely on for their inputs and outputs. The report warns that a default could trigger a downgrade of the U.S. credit rating, which could weaken the value of the dollar and make imports more expensive. It could also cause disruptions in shipping and logistics, as well as tariffs and sanctions from other countries that may retaliate against the U.S. for failing to honor its debts.
Reduced consumer demand: A default would also hurt consumer confidence and spending, which are vital for small businesses’ survival and growth. The report notes that consumer spending accounts for about 70% of the U.S. economy and that a default could cause a recession that would reduce consumer income and demand for goods and services. It also cites a survey by the National Federation of Independent Business that found that 76% of small business owners said that weak sales were their biggest problem during the last debt ceiling crisis in 2011.
The report urges Congress to act swiftly and responsibly to raise or suspend the debt ceiling before it is too late and calls on lawmakers to work together to address the long-term fiscal challenges facing the country. It also recommends that small businesses prepare for a possible default by reviewing their cash flow projections, diversifying their sources of financing, securing their supply chains, and communicating with their customers and creditors.
The report concludes by saying that “small businesses are the backbone of our economy and our communities, and they deserve better than to be held hostage by political brinkmanship over an issue that should not be controversial.”
Some relevant search terms for this topic are:
U.S. debt ceiling
Small business impact
Senate Small Business Committee report
Treasury Secretary Janet Yellen
Q: What is the debt ceiling?
A: The debt ceiling is a cap on the total amount of money that the U.S. can borrow to pay its bills, such as Social Security benefits, military salaries, interest on the national debt, and tax refunds.
Q: When will the U.S. run out of borrowing authority?
A: The U.S. hit its debt limit of $31.4 trillion on Jan. 19 and has been using accounting maneuvers to avoid defaulting on its obligations. However, Treasury Secretary Janet Yellen has warned that these measures could run out by June 1, leaving the U.S. unable to pay all of its bills.
Q: How will a default affect small businesses?
A: A default could have devastating consequences for small businesses’ access to credit, cash flow, supply chains, and consumer demand. It could also trigger a recession that would hurt economic growth and job creation.
Q: How can Congress prevent a default?
A: Congress can prevent a default by raising or suspending the debt ceiling before June 1, which would allow the U.S. to continue borrowing money to pay its bills.
Q: How can small businesses prepare for a possible default?
A: Small businesses can prepare for a possible default by reviewing their cash flow projections, diversifying their sources of financing, securing their supply chains, and communicating with their customers and creditors.
Raising or suspending the debt ceiling is not only necessary to avoid a catastrophic default but also beneficial for small businesses’ growth and prosperity. By ensuring that the government can pay its bills on time and maintain its creditworthiness, raising or suspending the debt ceiling helps small businesses access affordable credit, receive timely payments, secure their supply chains, and boost consumer demand.
Small businesses are essential for creating jobs, innovating products and services, and strengthening communities across America. They deserve support from policymakers who understand their needs and challenges.
By raising or suspending the debt ceiling before June 1, Congress can show its commitment to protecting small businesses from harm and enabling them to thrive in a competitive global economy.