How budget cuts might affect small businesses

NEW YORK — Small businesses across the country can expect to feel some pain if $85 billion in federal budget cuts go into effect on Friday.

Many companies are already being affected by the cuts, particularly those with federal contracts or that are subcontractors. Government agencies have been holding back on signing new contracts. They’ve also held off approving funds for existing contracts — for example, multiyear contracts that require money to be released in increments.

There is still much uncertainty about what might happen and when — and what businesses will have to do if the cuts are made.

“The government might come back and say, ‘we’re going to lose X amount of funding and you need to make adjustments to your spending levels on this particular contract,”’ says Shiv Krishnan, CEO of Induscorp, an information technology company in Vienna, Va., that gets almost all of its revenue from the federal government.

“Do I let certain people go, or do I initiate a furlough, asking everybody to feel some of the pain? We don’t know that yet, until the government gives some direction to us,” he says.

Other small businesses are also likely to suffer. Retailers’ revenue could fall because furloughed federal workers will have less money to spend. Restaurants, particularly those located near federal office buildings and other facilities, are likely to have fewer customers.

Anxiety about budget cuts has been one reason why small businesses have been slow to hire in recent months. Economists warn that the cuts could send the country into another recession.

Here are some questions and answers about the budget cuts and their expected impact on small business:

Q. Why are the budget cuts happening now?

A. A law passed by Congress in August 2011 called for automatic spending cuts if lawmakers could not agree on reducing the budget. The cuts, which now total $85 billion, were originally supposed to take effect Jan. 1, but Congress put them off for two months as part of an agreement on income taxes.

Q. How will small businesses be affected?

A. In several ways. First, companies that have contracts with the government may lose business because agencies may cut all or parts of some programs. Or they may delay some work.

There’s also likely to be an impact on small businesses that don’t have contracts, but that do business with contractors. Some of these small businesses are subcontractors. Others are suppliers who can lose business if contractors and subcontractors pare their expenses. An example: Corporate caterers are likely to get fewer bookings for parties.

If people who work for the government or federal contractors lose their jobs or are furloughed, companies that target consumers — retailers, restaurants and service providers like hairdressers — can be hurt.

A study by researchers at George Mason University and the economic forecasting firm Chmura Economics and Analytics estimated that small businesses across the country would lose more than 950,000 jobs as a result of the budget cuts. More than 157,000 of those job losses would come from federal contractors, with the rest from subcontractors and companies that cater to contractors and their employees. The university is located in northern Virginia, near the nation’s capital and home to many government contractors. The study was led by George Mason professor Stephen Fuller, who has studied the impact of public policy on the local economy.

It’s not known how many small businesses would be hurt, or how much revenue they would lose. The Small Business Administration says that there are about 130,000 small companies that have federal contracts.

Q. Which small business contractors are most vulnerable? And where are they located?

A. It’s too soon to know which companies will suffer cuts in their contracts because government agencies are still trying to determine how much their programs and contracts will be cut. But small businesses that are primary contractors or subcontractors with the Pentagon are expected to be at risk. The law calls for the Pentagon’s budget to be cut 8 percent and domestic agencies’ budgets to be cut 5 percent. The Defense Department has by far the greatest number of contracts, with $360.9 billion in primary contracts in the fiscal year that ended Sept. 30. In the previous fiscal year, small businesses were awarded nearly 20 percent of primary defense contracts, according to the most recent information available from the Small Business Administration.

The Department of Energy had the second largest amount of primary contracts in the year ended Sept. 30, with $25.1 billion, and No. 3 was the Department of Health and Human Services with $19.1 billion.

Businesses located anywhere in the country could be at risk for having their contracts cut. But three states — Virginia, California and Texas — may be the most vulnerable. Those states accounted for more than a quarter of all federal primary contracting dollars, with a combined $145 billion in the year ended Sept. 30.

Q. When will small businesses start feeling the impact of the budget cuts?

A. The cuts would take effect Friday, but the full impact may not be felt for some time. Government agencies cannot immediately furlough workers; they’re required to give employees a month’s notice. Also, agencies may still not know exactly where they’ll be making cuts.

But government agencies are holding off on new contracts or aren’t releasing money that has been allocated for contracts. Many agency employees don’t know yet where they’re going to need to make cuts — or how big the cuts will be. They don’t want to pay out money they might need for other programs. Spending by the Pentagon fell sharply in December because contracts went on hold, according to Small Business Administrator Karen Mills.

Contractors may also have a harder time doing business with the government if agency employees are furloughed. That could slow the process of getting contracts or contract payments approved.

Q. What are small businesses doing to try to offset the damage from the cuts?

A. Surveys of business owners have shown that they’ve been reluctant to hire or expand because they don’t want to increase their expenses when their revenue looks uncertain.

Some government contractors are seeking corporate customers to make themselves less vulnerable to federal budget cuts. Some are looking for ways to cut expenses on contracts so budget cuts would have less of an impact.

Centuria, an information technology firm, gave up office space in Charleston last fall and had some of its staffers work on government contracts from home, says Katie Arrington, a business development executive with the Reston, Va.-based company. Centuria made that decision based on expectations that the impending budget cuts would take place.

“The government doesn’t need to be renting that space,” Arrington says.

Other companies may be forced to absorb losses. Induscorp is waiting to see if it will lose money on contract bids it has made.

“You submit a bid, which costs a lot of money, and at the last minute, it can be canceled, so all of the effort you’ve put in up that point, that’s lost,” CEO Krishnan says.