How Would a Failure to Raise the U.S. Debt Ceiling Impact Small Businesses?

by Michael Essany

3 min read

It’s a date circled in red on the calendars of many — August 2nd, the date by which the U.S. debt ceiling must be raised in order to prevent the nation from defaulting on its financial obligations for the first time in American history.

While the date in question is nonchalantly floating around media headlines chronicling the political showdown on Capitol Hill, the matter at hand — and its pending resolution or continued deadlock — is of grave concern to countless small business owners who understand the stark consequences for their company should the U.S. fail to pay its bills.

The Ripple Effect

If the U.S. debt ceiling is not raised, the immediate impact will likely be that Moody’s — the international credit rating agency — will formally review the longstanding AAA+ bond rating U.S. Treasuries hold and swiftly downgrade that supreme standing. Historically, this credit rating has not only made it possible for the U.S. to borrow at exceedingly favorable rates, it’s also been used to attract precious and increasingly scarce global investment capital. If the U.S. loses its prime credit stature, access to capital will become strained not just for the U.S. government but also for its largest financial institutions. The smallest fish will find their financial ponds drying up first, so in turn, small businesses will find their access to everything from bank loans to government grants restricted to an unprecedented degree.

Similarly, if the August 2 disaster is not averted, small businesses will also find it more difficult than ever to hang on to their other lifeline: credit. In the absence of available credit, innumerable small business operations will soon grind to a halt, possibly within days of the government’s default.

Such a scenario would, without a doubt, deliver a devastating blow to small businesses — one from which many will never recover. So stark are the potential ramifications of the scenario outlined above that a growing number of market watchers believe the looming small business credit crunch will vastly dwarf the scarcity of credit that has plagued America’s small businesses in recent years.

While it may be difficult for most small business owners to imagine circumstances becoming any more challenging, the ugly truth is that conditions are already worsening and the nation hasn’t officially defaulted yet. According to the Federal Deposit Insurance Corp. (FDIC), the number of small businesses that received loans from large U.S. banks between March 2010 and March 2011 fell 14 percent — a drop in the bucket compared to what a failure to raise the debt ceiling next month could prompt before year’s end.

How Long Can Disaster Be Averted?

It all seems very uncomplicated on the surface. If elected leaders work out their differences in time, the August 2 deadline will be met and the debt ceiling will be raised, thus ensuring the economic catastrophe has been dodged. But this outcome — one expected by many analysts and investors at the eleventh hour on August 1 — is tantamount to a borderline-bankrupt spendthrift prolonging his solvency a tad longer by simply upping the limit on his already maxed-out credit card.

As the Associated Press reported on July 12, “Then there’s the matter of what happens after a deal is reached. The scenarios Wall Street economists have come up with for life after August 2 aren’t exactly rosy.”

Without question, the debt ceiling debate will not end with the passing of August 2. If the government’s borrowing limit is extended to $16 trillion, the U.S. Treasury gains little more than one year of “breathing room.” Afterward, the same debate returns and even harder debt ceiling decisions will have to be made… in the few remaining days before the 2012 Presidential election.

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