President Obama has launched a series of campaign-style events intended to gather input from small businesses and middle-class Americans regarding looming tax increases and budget cuts. And while there have been gestures toward a compromise between the president and Republican lawmakers, there is no clear end in sight.
Meanwhile, the clock ticks closer to the end of the year, when all the changes are scheduled to take effect.
While Congress and the administration engage in high-stakes brinksmanship, small, privately owned business owners are fretting the impact of a future plunge over the fiscal precipice. According to the 2013 Capital Markets Report from the Pepperdine Private Capital Markets Project at Pepperdine University’s Graziadio School of Business and Management, 79 percent of 851 private business owners surveyed are “concerned” or “very concerned” about the “fiscal cliff.”
Driven by real economics or fear, the consequences of inaction are grave for businesses – particularly small businesses. However, privately held small business owners do not have the megaphone awarded to politicians. If they joined the chorus, I’m sure they would say the best solution is resolution.
In fact, if the fiscal cliff circumstances are resolved quickly, there are three immediate benefits for small businesses.
1. Spur small business hiring
According to the 2013 Capital Markets Report, 57 percent of business owners surveyed say the top reason preventing them from hiring is domestic economic uncertainty/confidence. After 13 straight quarters of growth, the Congressional Budget Office estimates that gross domestic product would contract 0.5 percent from the fourth quarter of 2012 to the fourth quarter of 2013 if nothing were to be done.
When the economy stagnates or contracts, small businesses are hit first, hit hardest and take longer to recover. Hiring is hardly a concern when a contraction is all but certain. However, in the absence of detonation of the fiscal cliff time bomb, hiring would not only continue — it would likely accelerate.
2. Ease concerns about credit contraction
Concern among business owners about the economic uncertainty is translating into a drop in demand for external loans and other financing, indicating that many businesses do not see growth opportunities ahead. In an earlier study released in October, the Private Capital Access Index compiled quarterly in partnership with Dun & Bradstreet Credibility Corp., only 33 percent of 4,686 business owner survey respondents attempted to raise external financing in the last six months and of the small businesses seeking bank loans only a third (35 percent) were successful verses 77 percent of larger companies.
Furthermore, more than three fourths of small business owners said it was difficult to raise new debt financing (primarily bank loans). With greater certainly, financial institutions are logically better able to offer credit to entrepreneurs and business owners.
3. Alleviate private business owners’ personal anxiety
To head off a 2013 downturn, consumers, corporations and investors must feel greater confidence. Anxiety could be as detrimental as the fiscal policies themselves. Whatever the resolution of the fiscal cliff is, uncertainty in the marketplace does not bode well for instilling feelings of economic certainty or encouraging further lending.
The October study from Pepperdine found that 45% of small business owners had to transfer personal assets to their businesses over the prior six months to help address shortfalls. Talk about heartburn. U.S. economic recovery is dependent on many factors, one of which is small businesses having a sense of stability. Another is reassurance that fiscal policies will not change mid-game.
Overall, in looking at the present circumstances and survey data, it is clear privately held, mostly small businesses would join the chorus calling for resolution of the economic fiscal cliff.
Dr. John Paglia is director of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University’s Graziadio School of Business and Management in Los Angeles, Calif.
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