By now, of course, you’ve heard all about the “fiscal cliff.” But in addition to the across-the-board tax hikes that many pundits are talking about, there are implications for small and midsize businesses that don’t come up nearly as often. Namely, unless Congress comes together to bring stability back to the fragile economy, big businesses will likely be forced to turn against small businesses, which will in turn force small businesses to turn against America’s best interests.
If we go over the fiscal cliff — or otherwise perpetuate the economic uncertainties that accompany the cliff — some dire consequences are all but certainties for small businesses. Big businesses will need to hedge their bets to maintain their stock valuations, which means they will continue to hold onto the cash, as they’ve been doing in recent years. The fact that many big businesses count the Defense Department and other government agencies as some of their key clients certainly won’t help either. As a result, budgets will be cut and projects will be stopped and stalled — and this spending slowdown will be devastating to the thousands of small businesses that participate in this broader ecosystem.
But even when big-business-vendor spending isn’t altogether stalled, small businesses will feel a subtler — but often just as devastating — problem. As they often do during difficult times, many large businesses will slow down payment periods to existing vendors, even to those that have already completed contractual obligations. Getting accounts receivable into a small business’s bank account is already slow process, with the typical timeline in the range of 60 to 90 days. But if we take a jump over the cliff, that period will likely be extended to between 90 and 120 days or more, which can amount to a death sentence for the countless small and medium-sized businesses that face perpetual cash-flow challenges as they struggle to pay employees, rent, health insurance and a myriad other budget-line items.
So how will they stay competitive — and in business? In an effort to keep their doors open, many business owners will need to choose among two evils: seeking third-party financing alternatives or dramatically lowering their expenses, which often means cutting employees. Financing alternatives will not be easily or quickly found in an unstable, postcliff environment, when banks will likely decrease the size and frequency of their loans and credit lines. In a cliff-dive scenario, lenders may even decide to minimize their existing risk by lowering existing loans or credit-line totals, similar to the tactics taken in the most recent recession. Failing to secure bank financing would lead small businesses to alternative financing options, like invoice factoring or peers, which will undoubtedly become more expensive — and in some cases cost prohibitive — because of supply and demand.
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In short, a failure to address the fiscal cliff will force businesses of all sizes to move back into survival mode, as they during the recent recession, and American jobs will once again be the casualties. With small businesses employing the most people in America, that’s a lot of potential jobs being downsized — and a lot of voters.
Lucky for us business owners, this is all preventable … right?
Gerber is the founder of the Young Entrepreneur Council. In partnership with Citi, YEC fuels #StartupLab, a free virtual mentorship program. He is also a serial entrepreneur, regular TV commentator and author of the book Never Get a ‘Real’ Job.