Standard and Poor’s recent downgrade of U.S. government debt may seem too remote from small businesses to have any impact. But what really are the factors that the downgrade raises, and how can small businesses adapt to the change?
The U.S. government has sought to boost the economy out of recession by borrowing on the international wholesale markets and spending on a range of job creation, welfare change, and capital spending projects. A cut in the credit rating from AAA rating to AA+ by Standard and Poor’s raises the potential risk of a default on debt payments, and lenders to the U.S. government will seek an additional few basis points of interest to compensate for the risk.
How Credit Grades Change Fiscal Dynamics
Now a few basis points may not seem much compared with the rates a small business borrows at, but imagine the impact of any increase, no matter how small, on the $14 trillion dollar debt burden and you can see that less money will be available to prime the U.S. economy. Apart from the prestige of having the best credit rating, there is a real knock-on cost on the existing as well as new debt.
It may well be the case that some international lenders will not buy U.S. bonds due to the downgrade. That means borrowing may become more difficult in the near future, and the government may be required to consider even further cutbacks in spending.
What Can Small Businesses Do?
Secure any existing funding lines now before the effect ripples through the market. Do a thorough financial review and develop a detailed cashflow plan. Talk to investors and bankers about getting the business funded in the most appropriate way.
If your business depends on federal funding, then start to look hard at how to streamline your business even further to save on costs. You may come under pressure to retender for contracts as projects get closely evaluated for cost effectiveness in these tight fiscal times.
Know How Much It Costs to Borrow
If your business has any borrowings at all, then make sure you know the interest rate charged and the way the charges are actually worked out. Use a loans calculator to see how small changes in interest rate can affect what you may have to pay and see how changing the term can reduce monthly cashflow needs.
Armed with this information, go and talk to your lenders or investors and negotiate a secure fixed-rate core lending line with a flexible working capital facility big enough to cover the greatest periods of need.