U.S. Debt Default: An Awful Aftermath for Small Businesses

By at 25 April, 2023, 4:45 pm


By Karen Kerrigan – 

The Biden administration and Congress are at an impasse when it comes to responsibly raising the nation’s statutory debt ceiling and advancing spending reforms to address our record federal debt. Without an agreement, the United States would default on its bills – a tragic scenario that would ravage both our economy and America’s vibrant small business community. With so much at stake, both sides must take this option completely off the table.

Back in January, the government breached the debt limit and required the Treasury Department to begin taking “extraordinary measures” to avoid falling off the fiscal cliff. Treasury Secretary Janet Yellen indicated that these measures can be used to avoid a government default through at least early June. Beyond that, President Biden and Congress would need to agree to statutorily increase the debt ceiling in order for the federal government to continue to pay its bills. If the White House and Congress are unable to come to an agreement on raising the debt ceiling by the “X-Date,” the date that the federal government would run out of money to meet its obligations, the Government would default on its debt.

A default would set off a deluge of fiscal effects that would reverberate throughout the U.S. economy: job losses, a stock market sell-off, interest rate spikes, and a breakdown in credit markets. All of this would have a crushing impact on small businesses and the Main Street economy. Given current instability in our economy, along with tightening credit and relentless inflation that are chipping away at small business confidence and viability, business owners and entrepreneurs certainly do not need another financially-traumatizing event.

Increased Interest Rates

Countless small businesses across the country use loans to grow their business, keep the doors open, or get their new ideas off the ground. If the federal government defaults on its debt, which would be followed by a lowering of the U.S.’s credit rating, interest rates would rise. As it stands now, 60% of small business owners report that rising interest rates are having a negative effect on their businesses, according to SBE Council’s latest Small Business Check-Up Survey to be released the first week in May. Aggravating current conditions through a default would further depress private and SBA-guaranteed loans. It will also greatly increase the cost of borrowing for residential or commercial mortgages.

Restricted Credit Markets

Creditors would immediately pull back on lines and activity, and opportunities for small businesses to access capital would go dry. Budding entrepreneurs would find it nearly impossible to access startup loans or other forms of capital and credit. Again, and already, a credit crunch is beginning to make its way through the economy – 44% of small business owners have reported “negative effects” in their efforts to access credit, according to the SBE Council Small Business Check-Up Survey. An imbalanced and wobbly economy with limited capital, means investments and risk-taking activity would pull back. Entrepreneurship and new business creation would suffer.

Sinking Stock Market

A U.S. Government default would trigger an immediate and negative response within the stock market, affecting both institutional and retail investors, as well as publicly traded companies. Average investors and 401(K) plan participants would see the value of their holdings and savings shrink, while individual companies would see their value fade. The downstream effect would lead to reduced consumer spending, which means added financial pain across various industries that count on robust consumer spending to survive.

Delayed Treasury Payments

Delayed payments from the Treasury would be felt by consumers and small businesses alike. The Treasury would be forced to stop payments to those who rely on those payments as a source of income. For example, Social Security recipients, federal employees, and government bondholders could all see payments stalled. Obviously, this would reverberate throughout the economy in terms of reduced purchasing power, missed loan and bill payments, and suppressed economic activity in general. Moreover, small businesses that serve as federal contractors could experience missed payments.

Hits to the U.S. economy that have occurred overtime through events such as the great financial crises and COVID-shutdowns imposed disproportionate financial pain on small businesses. A U.S. Government default would be no different. Small businesses would pay a harsh price if Congress and the White House fail to act by reaching a reasonable deal. President Biden and Congress must avoid a catastrophic default and secure the American economy. Indeed, many small businesses would not be able to withstand another financial hit on the scale that a default would bring.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.


News and Media Releases