What the Debt Crisis Means for Small Businesses

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The U.S. economy has a debt crisis — as  highlighted by the recent, eleventh-hour decision to raise our debt ceiling, and the much-publicized government shutdown. As a result, the new small business is having to pivot accordingly and respond to the the lack of consumer confidence that these economic events have created.

The debt crisis has had undeniable ripple effects. The new consumer has weathered an international economic crisis, a debt ceiling debacle, and a government shutdown. Consumer confidence is low during this time of recovery; this  is clearly one issue of concern, but there are more far-reaching issues that have developed as well.

  • Consumer Spending

There is a probability that the holiday sales that are predicted for the next few holiday shopping days will be lower than expected. Consumer spending has decreased significantly over the past several years of economic turmoil. Buyers are expecting small discounts and bundling options for many of the standard consumer products. Discounts are useful during times of economic stress. Small businesses are having to add further customer service features for their businesses as well. Customer service is expected to be more comprehensive for the new modern consumer. A long term effect could mean an increase in overall production costs.

  • Debt Trajectory

The debt concerns that existed before the debt ceiling was raised still exist. Signing the debt bill raised the limit of borrowing for the U.S., but the existing debt remained the same. Small businesses continue to have difficulty borrowing since most modern banking institutions think twice or deny loans more frequently now. Some products and services that are offered by small businesses are no longer bringing in a profit. These unproductive items are being eliminated. Some unemployment is resulting from this type of small business house cleaning. Less expensive supplies for small businesses are being purchased. This type of cheaper spending is a short term solution. The longer term consequences could mean a slower economy and a more limited business output.

  • High Interest Rates

The fall out from the recent debt scenarios has included another U.S. economic problem. Banking institutions are charging higher interest rates for any small business loans that are approved. Small businesses are needing credit scores that meet certain new banking standards, and the loans given out have higher interest rates charged. Small businesses can select alternative methods of borrowing. These alternative methods have their draw backs. Borrowing from friends and family can be a short term fix with certain consequences. Blending business and personal monies often has additional problems. Credit cards can be used instead of small business loans from the Small Business Administration. Credit cards are a fast fix with severe interest rate consequences. The high rates on credit cards assure that the borrower will be paying back these short term loans for a long time. Internal loans can be used, but these lending products have high interest rates as well.

There are other concerns facing the new adjusted U.S. economy that are too obtuse to address directly: Municipal debt would one example that continues to worry finance wonks.

Partners and investors can be used during economic times of crisis. This type of solution can be helpful, but the business ownership is in a state of flux. Take overs can occur, and a small business can have new owners.  For more from Mike Thomas, the author of this article, visit his site.

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