Not too long ago, all of us would have deemed it unthinkable that the United States of America would have difficulty borrowing money. Of course, right now, it has no such difficulty. It’s borrowing vast sums with relative ease.
Ok, but let’s peek around the corner to get a glimpse of what may lie ahead. Increasing federal deficits are dramatically enlarging the national debt. Should this continue, we can expect to see government interest costs consume an ever-larger share of the annual budget, crowding out defense and vital social programs. At some point, U.S. government obligations will be viewed as somewhat less than “risk free.” It’s been observed that some investors already think that way, especially after Moody’s recently announced it changed its outlook on U.S. government debt from “stable” to “negative.” A near future ”risk premium” isn’t out of the question.
What does the government’s debt troubles mean for business?
It’s simple: Business interest rates will have to increase also. The natural result of that is most businesses will require more equity in order to operate safely and profitably. That equity will be generating smaller returns than when it could be leveraged. Equity fund managers won’t be able to raise money as easily. Once promising projects and businesses won’t take off too easily. GDP growth will slow. Absent a political miracle, the U.S. economy will likely stagnate.
Doom and gloom? Maybe not. Your crystal ball might work better than mine. I could be wrong, but most of us can agree that interest rates will be high and stay high for quite a while.
Protracted high interest rates increase the likelihood of businesses experiencing more frequent working capital dramas. This makes it imperative they have partnered with a compatible lender who will react thoughtfully to their needs and is able to modify terms in a manner conducive to maintaining or increasing the value of the enterprise.
At Capital Access Partners, we are firm believers that businesses seeking capital of any kind should pay maximum attention to compatibility with their capital providers. Optimal Pairing™ = Optimal Results.