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S&P Downgrade 101: Mini Series Part 2

Friday, August 12, 2011 at 3:40PM

A few days ago I talked about what the S&P downgrade meant and where it came from. I touched on some of the implications of it as well and today - as financial markets end an extreme week - cover how this volatility will effect you and your small businesses.

Let’s start with small business and more specifically the ease of obtaining capital for small businesses. It should be no surprise to see interest rates begin to creep up with this downgrade. Although the Fed has maintained that it’s rates will remain low for the foreseeable future - loaning to small businesses is a different story. By virtue of being a small business or start up you carry more risk than most. The application process and security necessary to secure funding was steep already and now rates will begin to climb. The increase in the cost of money means that businesses wouldn’t have the same amount of funds to spend on the businesses. Part of being able to grow a business is investment in plant, equipment and labor - navigating this on a potentially leaner budget is going to be a top priority.

Let’s talk about the other side of the transaction for just a second. While most of us, as consumers, see and hear about what’s going on in the news there are some things that are just inelastic in our everyday lives - like putting gas in vehicles and buying milk and eggs. Outside of those inelasticities in our consumption there is a lot more discretion in where our dollars go. The uncertainty in consumer confidence that is inspired by this downgrade could have a big effect on the health of small businesses in the short term. I’d like to ask you a question: are you spending more or less with all this uncertainty? Now before your answer I want you to be honest! Odds are you are probably hanging on to your hard earned dollars longer, or it takes you longer to make a buying decision. It’s ok - there’s nothing wrong with being skeptical in a market like this and having reservations about your and our nations financial future. Professionally speaking (and this is solely my opinion): we’ll see short term uncertainty and slow down but this downgrade could be the catalyst to spark a new level of growth that we haven’t seen in over a decade. So to keep small businesses going and an economy moving forward it’s important to seriously evaluate where your uncertainty stems - and if possible try to get past some or all of it and keep the velocity of the dollar going.

What this downgrade could mean to you! Well instead of conversationally going through what might happen for consumers individually, I’d like to list some bullet points for you to keep an eye on.

Watch your credit card interest rates: you don’t want to overlook some outrageous increase because a credit company’s balance sheet might have a new level of risk.
Watch your mortgages: regardless of what the news says about company's pledging to keep mortgages customers first and safe you never know what banks might try.
Shop smart: there’s the chance of an acceleration in inflation for the products we consume so make sure your personal budgets are as efficient as possible.
Don’t panic in your portfolio: now I think you should have definitely checked in with your professional by now if you haven’t already. DO NOT ACT IRRATIONALLY! Markets ebb and flow all the time and if you look at your portfolio over the last 8 quarters odds are you are still doing pretty well if diversified, dollar-cost averaging, and not emotionally trading! If you have some cash in the sidelines now might be the time to make some moves. Make sure you consult with your professional first though.
Stop worrying about a double dip or second Great Depression: It’s just not going to happen on the downgrade alone and stressing out about it can be harmful to your help. Instead keep spending because that’s how an economy keeps moving forward.

Hope this mini series helped to get you caught up on what’s going on with all this downgrade talk. Now I specifically tried to keep the politics of the situation out of it because I didn’t want to start some kind of argument over it and take away from the understanding of what’s actually going on. If you have questions or concerns make sure you leave them in the comments because I know this is a huge issue and will be one for a while. I would love to see what you all have to say.

Nunzio Bruno |

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