What it Could Mean for Your Small Business If the Federal Debt Ceiling is Not Raised

The U.S. Congress currently is debating whether to raise the Federal government's debt ceiling. According to Treasury Department, the government could hit its debt limit sometime in May. Apparently there are some technical moves the government could make to put off the day of reckoning a bit further, but without some action, in the next few months, the debt limit could be reached. Although none of us know for sure how the markets would react if this happens, the implications for your small business generally don't appear to be good. Here are a few of the possible effects on small businesses if the debt limit isn't raised.

First, some economists believe not raising the debt limit could push the economy into a recession, because government spending would have to be cut drastically. The government would have enough revenue coming in to continue to pay principal and interest due on its debt and, therefore, to avoid default. But it would not have enough revenue to pay all its bills. Spending on big programs like Social Security, Medicare, Medicaid and defense would have to be cut sharply and these cuts would have a ripple effect through the economy resulting in lower consumer spending. For most small businesses, recession means lower demand and, therefore, less revenue and cash flow.

Second, financing for small businesses could dry up. The combination of a weaker economic outlook and uncertainty related to government spending could restrict lending except for the highest quality borrowers. Therefore, if your small business doesn't already have secure financing in place, its sources of capital, both short term and long term, could disappear.

Third, the cost of capital could rise, so, even if your business has financing in place (such as a line of credit), unless it has a fixed rate that can't easily be changed, you may be paying much higher rates. However, what happens to interest rates if the debt ceiling isn't raised is unclear. While many economists believe rates will rise because of increased financial uncertainty and economic risk, others suggest that sharply falling demand and the resulting recession might actually cause rates to fall. In reality, whether rates rise or fall may be irrelevant to your small business if demand drops sharply, revenue declines and the capital you need isn't available at any price.

While no one knows for sure what the specific repercussions of reaching the debt limit would be, since this is uncharted territory for the federal government and for the economic prognosticators, it is hard to envision it as not having negative implications for small businesses in the near term.

Sources:

Jeanne Sahadi, http://money.cnn.com/2011/02/17/news/economy/debt_limit_spending_cuts/index.htm, What happens if the debt limit isn't raised - February 17, 2011

John Carney, http://www.cnbc.com/id/42686462, What Happens to Bonds If the Debt Limit Isn't Raised - CNBC

More from this Contributor:

http://www.associatedcontent.com/article/7947633/how_to_find_the_right_small_business.html?cat=3, How to Find the Right Small Business Consultant

http://www.associatedcontent.com/article/7936739/fiveyear_checklist_for_a_small_business.html?cat=3, Five-Year Checklist for a Small Business

http://www.associatedcontent.com/article/7877720/setting_up_payroll_for_a_small_business.html?cat=3, Setting Up Payroll for a Small Business

http://www.associatedcontent.com/article/7845304/find_the_hidden_profits_in_your_business.html?cat=3, Find the Hidden Profits in Your Business