Higher interest rates are intended to curb inflation and stabilize the economy. But this monetary tightening has come with unintended consequences, particularly for the backbone of the U.S. economy: small businesses.
According to "Shark Tank" star Kevin O'Leary, small businesses are having a hard time getting financing.
"The regional [banks] don't know yet what their capital requirements are going to be. So, their loan books have closed like a turtle in a shell," O'Leary told Fox Business's Larry Kudlow in a recent interview. "And what's it doing to small business? Killing them right now."
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O'Leary pointed out that for businesses generating under $500 million in sales, accessing the banking market can be challenging these days.
"You're going to the shadow market now primarily for things like factoring receivables. If you're a company that's selling to a big-box retailer, you can get factored at about 17% to 18%. That means you can turn your receivable into cash and buy more inventory," O'Leary said.
O'Leary added that there are nonregional bank lenders in the market, such as hedge funds, family offices and private entities. But this could have serious consequences.
"What I anticipate is going to happen here — while we still have full employment, which is remarkable — and you don't put any capital into the small business sector, which is 60% of the jobs in America, you're going to start to see some real chaos come September, October, November," he said.
‘No Bidenomics For Them'
Monetary policy is in the hands of the Federal Reserve. But according to O'Leary, the issue extends beyond the central bank.
"This is an issue for Congress, Larry. It's very simple," he said. "They gave all their money to S&P 500 in two acts, the Chips and Science Act and the other, Inflation Reduction Act. Not a dime for small business. A trillion for the big boys, nothing for the small guys. And the small guys, they run America, so it has to be rebalanced somewhere."
It’s not the first time for O'Leary to highlight this problem. As an investor in numerous businesses, he has felt the impact first-hand.
"I was on the Hill yesterday. I was banging the drum up and down the halls saying, ‘Everybody, let's wake up to what's happening to my small companies.' I got 34-plus companies. They can't raise a dime. There's no Bidenomics for them. They have no capital," he said in a Fox News Interview in July.
An Opportunity For Investors
As O'Leary pointed out, there's one group of companies that stand to benefit from the government's massive spending bills — the S&P 500.
"If you're an S&P 500 company, you've got clear sailing for the next three to four years," he said in a separate interview last month.
If you share O'Leary's view and want to invest in the S&P 500, there are many exchange-traded funds (ETFs) that provide convenient access to the group.
For instance, the SPDR S&P 500 ETF Trust SPY was launched in 1993 and now has $412.8 billion in assets under management. It tracks the price and yield performance of the S&P 500 Index and has an expense ratio of 0.0945%.
Investors can also look into similar exchange-traded funds (ETFs) from other issuers, such as the iShares Core S&P 500 ETF IVV and the Vanguard S&P 500 ETF VOO. These funds have expense ratios of 0.03%.
While the benchmark index showed impressive gains in 2023, it's not always smooth sailing. Last year, the S&P 500 tumbled 19.6%.
If you don't like that kind of volatility, you might want to look into reliable income plays outside the stock market — such as investing in rental properties with as little as $100 while staying completely hands-off.
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