Small business outlook
Small business optimism ticked up recently. The National Federation of Independent Businesses’ Small Business Optimism Index increased 0.9 points in July to 91.9, although that’s still lower than the 49-year average of 98.
O’Leary believes the numbers mask a deeper issue.
“We have a crisis emerging,” he said, referring to the 10 consecutive interest-rate hikes the Federal Reserve has imposed since March 2022. “These rapid rate hikes that have occurred and the unprecedented speed of these hikes has put my small businesses [in a difficult position] … The cost of capital has gone through the roof.”
O’Leary believes smaller companies are particularly vulnerable.
“If you’re in the S&P 500, you have no trouble financing your business,” he said. “You can’t say that about small businesses anymore.”
He goes on to highlight the fact that small businesses with five to 500 employees represent 60% of the U.S. economy, which is why this liquidity crunch is a concern.
“We’ve got a real crisis coming here,” he said. “When the Fed raises rates another 50 basis points that’s going to make it worse.”
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More pain ahead for some sectors
Analysts at Morgan Stanley believe that if interest rates stay higher for longer, companies with weaker credit ratings could be most impacted. But businesses of all sizes operating under tight margins share this risk — if they’ve borrowed too much money in the past, the rising cost of interest could push them into losses.
Some over-levered companies have, in recent years, been able to just barely pay the interest on their debt, thanks to historically low rates, but their principal has remained. Now these so-called “zombie companies” are being pushed over the edge into bankruptcy. Bankruptcy filings surged 15% year over year as of July.
Simply put, all businesses are vulnerable to the rising costs of servicing debt. But companies that are large enough or publicly traded can raise capital from the stock market, whereas small and family-owned businesses may have no choice but to shut down, liquidate or enter bankruptcy.
O’Leary says some small businesses should turn to government tax credits and support programs to survive. His focus is on the Employee Retention Credit, which could help some businesses meet payroll and avoid layoffs during the recession and credit crunch.
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