(This column originally appeared in the Philadelphia Inquirer)
Congress will vote this week on an extension to the federal debt ceiling. If not approved by the first week of June, many consequences could befall the U.S. economy, particularly small businesses.
A shutdown would also cause many companies that receive — indirectly or directly — payments from the government under federal contracts to find themselves without the cash they need to pay their bills.
A survey released this month from Goldman Sachs found that nearly two-thirds of small business owners say they will be negatively impacted if a default occurs.
“I think in particular the businesses that are in the federal procurement space are naturally the ones that are most worried and stand to be directly impacted,” said Joe Wall the National Director of Goldman Sachs’ 10,000 Small Businesses program. “They could be impacted in a potentially significant way depending on how long the potential default period would last.”
The disruption in markets caused by such an unprecedented event would raise borrowing risks, potentially increasing interest rates and making credit less available, particularly for smaller companies.
It could also cause significant declines in stocks and other financial instruments which would impact savings and collateral. Businesses that rely on workers from the government’s more than 300,000 owned properties may also see a drop off if the situation persists. Some economists believe that a prolonged default could cause a significant worldwide recession.
Hopefully this won’t happen. But it could. My best clients are always thinking ahead, so what should businesses — particularly small businesses — be doing right now to prepare?
It’s important to assess your cash situation and make sure there’s as much cash as possible in reserve.
“Hang on to cash to weather the consequences of a government debt default and consider borrowing, while possible, at potentially lower interest rates,” said Lenin Agudo, director of the Small Business Development Center at Widener University. “You should also consider delaying significant business decisions amid the economic uncertainty.”
Agudo also recommends preparing for banks to tighten their lending practices. Another word of caution: “Assess the consequences of increased interest rates if you have adjustable rates in your lines of credit.”
If your business is exposed to the risk of a shutdown, it’s important make sure your customers, suppliers, employees, and others in your community know.
If you contract with the federal government, or a company that gets its funding from the federal government, make sure you’re completely up-to-date on your invoicing. Don’t wait until the end of the month. Get your invoices delivered as soon as possible so at least they’re in the system and can be in the queue for payment once the funds are available.
If you think your business will need services that are available now — such as tax questions answered from the IRS or expedited passport approval — now is the time to take action. You should take steps to use these services this week before those service potentially become unavailable. The same goes for loan applications in process.
“If something does happen, it’s important to make sure any loan applications you have in process are completed properly now and that you have all your ducks in order,” said Jack Musgrove, the chapter co-chair of SCORE Philadelphia, a non-profit agency advises small businesses. “Make sure that you have every possible thing they could ask for in the application so that there’s no reason to turn you down.”
Finally, if you find your business is impacted by this event, then consider why.
It’s possible that you’re too reliant on the federal government for your livelihood and reliance on any one customer — even the U.S. government — is not the best long-term business practice. Consider diversifying your customer base in the future to spread the risk of any one customer not paying the bills.
“What you learn about accounting, is how not to have too many of your eggs in the same basket,” said Wall. “There are some small businesses and a lot of minority-owned businesses that really went all in on getting government contracts, which is great, but if they’re the mainstay of your business, you have to be aware that even the government sometimes has its payment problems.”
Musgrove doesn’t believe that the government will go into default or that a shutdown will occur. But he does say that business owners should be prepared.
“If something does happen of course its small businesses that will get hit first,” he said.
