The White House and congressional Republicans have yet to reach a debt ceiling deal, and the possibility of a US default looms on the horizon. Business owners, along with the rest of the country, are in wait-and-see mode, bracing for a possible recession and job losses in the event of a prolonged default.
But there are some things they can do to prepare.
To help protect themselves, companies should evaluate their exposure to government contracts, consider holding onto more cash and offloading short-term Treasury bills that mature within a year, according to experts.
While some still think a default is unlikely, the nonpartisan Congressional Budget Office said earlier this month that there is a “significant risk” the federal government won’t be able to pay all of its obligations in the first two weeks of June. Treasury Secretary Janet Yellen warned that could happen as soon as June 1.
“We all hope that we don’t default. But hope is not a plan,” said Joshua White, assistant professor of finance at Vanderbilt’s school of management. “Companies need to have a plan.”
Figure out exposure to government funds
Some companies may not be immediately impacted by a default. But those that have contracts with the government could see delays in their payments as soon as the US runs out of cash.
In the event of a default, there could be a few weeks of delayed payments. In that period, landlords, vendors and others may be more flexible and accept later payments, said Harry Mamaysky, a professor of professional practice at Columbia’s business school.
Businesses that rely on government payments should be prepared for delays. “You have to make contingency plans,” he said.
A poster at a bus shelter shows the national debt in Washington, DC, on May 21, 2023.Mandel Ngan/AFP/Getty Images
Defense and health care could be particularly vulnerable to a default, because they tend to depend on government funding. Private companies, like tech companies, may also hold government contracts.
White recommends companies in those industries, especially, hold regular meetings to figure out a plan in case payments are delayed. JPMorgan Chase CEO Jamie Dimon told Bloomberg earlier this month that the bank was holding weekly meetings to prepare for a possible default.
“At some point, [the government will] work it out,” White said. But until then, companies “need to know, can we last until that point? And how long would that be? How hard would that hit us for our cash position?”
Hold more cash
Even businesses that aren’t directly exposed to government funding should have a plan, he said.
If your customers or suppliers aren’t getting paid, chances are they’ll pull back on spending or may run into their own disruptions that could impact your business.
In “military towns, towns that are heavily dependent on government funding … that would spill over to the local community,” White said.
Smaller businesses in this position might not need to hold weekly meetings, he said. But they might want to consider holding onto more cash, and perhaps diversify into holding non-US currencies in case the value of the dollar falls.
A government default would likely push interest rates up, making it more expensive to borrow money. “Having a strong cash position now I think would be very helpful,” White said. Companies can do that by hitting pause on big projects.
Plus, a default could make it hard to access credit, noted Kent Smetters, professor of business economics and public policy at Wharton.
Small- and medium-sized businesses often use lines of credit to help them make payments to suppliers when they’re short on cash, like after wholesale goods are purchased but before sales are made to consumers.
“If I’m a bank, probably I’m going to cut back quite a bit on credit,” Smetters said. That’s because banks’ deposits are often themselves often tied up in Treasury securities — which the government may not pay in a timely fashion in the event of a default.
Offload some Treasury bills
Just as banks will likely be mindful of their government bonds, so should companies that hold Treasury bills themselves.
If you own a Treasury bill that’s set to mature in early or mid June, “and you’re relying on receiving that money because you need to pay that money to a vendor … you may be stuck for a week or two, while Congress haggles about raising the debt ceiling,” said Columbia’s Mamaysky.
Companies in that situation who need their payments immediately might consider placing that money into an FDIC-insured account instead of risking a delayed payment, he said, even though they are likely to lose money on the trade.
Get back to basics
Cynthia Franklin, director of entrepreneurship for the W. R. Berkley Innovation Labs at New York University, works primarily with small companies and startups. The advice she’d give businesses now is the same she gives to those early stage businesses, she said.
“If there were a default on the US debt, it would make borrowing costs higher, it would mean consumer confidence might go down,” she said. “There are a lot of areas where it would be appropriate for a company to do a little belt tightening.” But, she noted, “that’s just what a business should do anyway.”
Franklin tells companies to “be agile and adaptable,” and to diversify their customers so they don’t rely too heavily on one source of income. Companies should also be as efficient as possible so they’re not spending more than they need to, she said.
“When we talk about preparing for an economic downturn or economic uncertainty, it really is doing those things that we should have been doing all along,” she said.
“When we encounter these rough periods, they’re less forgiving of those businesses that haven’t been minding the basics,” she said. “But companies should always be minding the basics.”
Source : CNN
