Kevin O’Leary, star of the popular show “Shark Tank,” recently issued a grave warning about the state of the economy and the impact it could have on small businesses. The legendary businessman claimed there is a “crisis emerging” that has a disproportional impact on smaller companies trying to stay afloat.
Despite the current administration’s propaganda on “Bidenomics” and “building back better,” O’Leary paints a much different picture for small businesses that rely on access to capital for funding operations. “I live in the real world. I’m here on the Hill today in Washington talking to everybody I can about the problems I’ve got in just getting working capital for small businesses. We have a crisis emerging,” he said.
O’Leary addressed the Federal Reserve’s historic raising of interest rates to combat inflation over the past several years. This has made it substantially more difficult to obtain debt as interest payments have become more burdensome, and banks are tightening their lending standards amid economic uncertainty. “These rapid rate hikes that have occurred, unprecedented speed of these hikes, have put my small businesses, and I’m talking about companies with 5 to 500 employees, which represent over 60% of our economy,” O’Leary said.
The “Shark Tank” star also talked about the disparate impact this is having on smaller businesses, where giant cash cow corporations will always have more options in financing their companies. “If you’re in the S&P 500, you have no trouble financing your business. You can’t say that about small business anymore. The cost of capital has gone through the roof,” he said.
O’Leary also pushed back on a small business optimism gauge that suggests an increase in confidence in June that rose to a seven-month high. According to the National Federation of Independent Businesses, the Small Business Optimism Index jumped by 1.6 points to 91 points last month.
However, O’Leary doesn’t buy this notion based on his personal experiences when communicating with small businesses. “I’m in the real world talking to CEOs of small companies that are family owned in America in almost every state, every day. They’re not happy either. So I’m not listening to that data. I’m dealing with reality,” the businessman claimed.
Another thing to consider is the impact of the high-profile bank failures earlier this year. Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed earlier this year. First Republic was the second-largest bank failure in U.S. history. Following these seismic events, banks began tightening their lending standards to shore up capital and improve liquidity under uncertain economic conditions and fears of the banking collapse spreading.
Banks reported increasing their lending standards across the board, particularly to small businesses, which pose a greater risk than large companies. Furthermore, small and mid-sized banks lost billions in deposits following the banking crisis. Clients moved their cash to larger financial institutions over fears of bank runs spreading to other small, regional institutions.
Small regional banks play a critical role in lending to small businesses. Therefore, this could make it even more difficult for small businesses to obtain loans as these smaller institutions shore up their lending, pulling liquidity out of the economy. While we haven’t yet seen a “credit crunch” where lenders severely pull back credit, tightening lending standards, particularly to small businesses, will surely slow down the economy. Many predictions have the U.S. entering a “mild recession” in the near future.
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