Credit Downgrade and Small Businesses

S&P downgrading the U.S. rating from AAA to AA+ is the first time since credit rating business started that America’s credit rating has been downgraded. Since Washington reached debt ceiling and jobs numbers came in at a relatively healthy 117,000, this downgrade was unexpected to a certain extent. However, the major issue is that the debt ceiling deal is very ambiguous in nature. The spending limits have been raised by $2.3 trillion by 2013 while cuts of $2.1 trillion are spread over 10 years.

What does all this mean for small business owners as they are already concerned by slow or no growth in the economy?

They key effects of credit downgrade are:

The U.S. government’s leverage to pump the economy has gone down even further.
That means that cuts in federal spending along with increases in taxation is going to come a lot sooner. This will lead to even more weakening of the growth in the U.S. economy in the short to medium term, and increasing the taxation rates for small business owners both in the business and personal side will not help. Cuts in government spending will affect innovation even more in the short to medium term and will cause a slowdown in innovation in the economy. Small business has led the US out of every recession after the Great Depression until now. Coupled with increased globalization, the job growth and overall demand in the economy will be anemic and will lead to stagnation in the economy.

Interest rates will go up in near future as the cost of borrowing money in the U.S. will go up.
Lack of credit access coupled with higher interest rates will raise the cost of capital for small businesses, both further hurting the bottom line of small business and slowing job growth even more. The dollar will fall, thereby raising the costs of imports, including gasoline. Coupled with weak real estate prices, this means small business should be braced for tough times.

However, everything is not gloom and doom, as a weaker dollar and lower costs can make the small businesses more competitive. Small businesses, when run efficiently, can become big export engines, as Germany has shown. The key issue is whether the small businesses will get enough incentives and support including seller financing from U.S. Exim Bank to boost the exports. Also, small businesses will need to make cash flow more efficient, become more cost conscious, and learn to operate in an economic environment that will see very low growth over the next three to five years.

The S&P credit downgrade should be a wake-up call for the U.S. policy makers and business owners. It may indeed act as the best stimulant for the economy overall. Otherwise, America is set on path of declining power such as the UK in the post-World War II era.