How a government default could impact small businesses — LJ Suzuki

There still needs to be a concrete resolution to the government shutdown. If the debt ceiling is not raised, the government may face difficulties in meeting its financial obligations. Which can have a ripple effect on various sectors of the economy, including small businesses. On today’s Small Business show, we’re joined once again by Small Business Expert, Serial Entrepreneur, and the CEO of CFOshare, LJ Suzuki. Where he discusses the ways small business owners should protect their finances and small business against a future government shutdown. 

Default v. Shutdown

Any small business that uses any debt capital, whether they know it or not, it’s underwritten by the faith and confidence of the U.S. government to finance its treasury obligations. Suzuki explains, “It’s like when you’re buying your first house, and your parents co-sign the mortgage.” That’s an implicate thing happening in all the business debt markets currently. So, Suzuki continues, “If the government fails to meet its obligations, it will shake its credibility in the global financial market. This may lead to higher interest rates for every small business that borrows money and lower purchasing power for the American dollar. “It impacts anyone with global supply chain customer bases,” asserts Suzuki. 

Moreover, whenever you discuss the global financial market, “It’s implicitly connected to credit and the availability of capital.” Or in other words, the  U.S. government has had the privilege of printing cash, which didn’t shake our people’s confidence or substantially change interest rates. However, Suzuki claims, “We’re approaching the end of an era: ‘Dollarhood Gemini,’ which is where the U.S. dollar dominates the political sphere of the world.”

"We've already dug our grave in terms of a default, which will impact credit and what we have to pay for it."

Suzuki articulates, “The difference between a shutdown and a default is technical.” A shutdown is when Congress fails to pass a budget that appropriates funding. However, we currently have a functioning budget; the issue is that we ran out of money- or we will run out, to fund the existing budget. 

During previous shutdowns, the government has prioritized paying interest and paying down debt for borrowers and lenders so that they would have confidence in the capital market. However, “This could be the first time in American history that we fail to meet debt service. Which also makes this time different from prior government issues,” declares Suzuki. 

Short v. Longterm Consequences

If Congress is unable to reach an agreement, Suzuki claims that “It won’t necessarily result in a government shutdown, though it will restrict its capabilities.” Additionally, the restrictions would apply under conditions like a liquidity crunch. In which Congress will need to prioritize what matters most. Suzuki further explains that some will immediately be impacted when it comes to small businesses. For example, “Any business with a floating rate loan” includes companies with a line of credit where interest rates can fluctuate. Also, for those businesses with adjustable-rate loans, as interest rates increase, the borrowing rate will too. 

"Small businesses remain the future, but you must be wise, think forward, and manage your risks."

When the American dollar weakens, it will drive up costs. However, Suzuki emphasizes, “If you’re a company that exports goods overseas, the default will affect you the most regarding trade rates.” However, there are a few solutions for short-term and long-term effects. Such as:

Short-term solution: Engage in foreign exchanges, called forward or futures. It will limit exposure to the magnitude of how those short-term stocks will be. Whereas, in the Long-term, the impact will still be there, but the theme around the solution- which has been around since covid- is diversifying your supply base. 

Suzuki concludes, “There is still a lot of growth in the small business space, but it has slowed down in the last six months.” However, when examining the macroeconomic picture of growth, small businesses account for majority of it.