Fall in U.S. Credit Rating: What It Means for Small Businesses
Standard and Poor’s recent downgrade of U.S. government debt may seem too remote from small businesses to have any impact. But what 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 to AA+ by Standard and Poor’s raises the potential risk of defaulting debt payments. Lenders to the U.S. government will seek an additional few basis points of interest to compensate for the trouble.
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 an actual knock-on cost on the existing and 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 shortly, 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 cash flow plan. Talk to investors and bankers about getting the business funded most appropriately.
If your business depends on federal funding, then start to look hard at streamlining 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, then make sure you know the interest rate charged and how the charges are 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 cash flow needs.
Armed with this information, 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 most significant need periods.