The Washington Post

Commentary: At two-month mark, sequestration’s toll on small businesses only beginning

Small businesses have been a key missing ingredient to the economic recovery, and despite signs the overall job market is improving, many small business owners remain pessimistic about future plans to hire.

Defense spending cuts will soon start trickling down to small contractors and subcontractors, Graziano says. (STAFF/AFP/GETTY IMAGES)

But what’s actually keeping small businesses from hiring? Sure, the Affordable Care Act has taken a toll, and the recent tax increases will have an effect, eliminating some disposable income for business owners.

However, right now, the biggest issue affecting small businesses, especially in the Washington metro area, is the sequester.

While the effect of the sequester alone is not catastrophic, it comes on top of a depressed economy. The cuts are expected to create a drag on GDP during 2013, bringing down our output by as much as 0.6 percentage points.

The sequester may mean less loan guarantees by the Small Business Administration; the National Association of Government Guaranteed Lenders estimates the reduction at just over $900 million in loans backed by the agency.

It is also expected that the SBA’s Office of International Trade will reduce its support to exporters, which will affect more small firms.

As we move into the second and third quarters of the fiscal year, we can expect the sequester to start affecting the NFIB optimism index as our slow-growing economy continues to struggle.

Sequestration will result in $85 billion of cuts to the budget the rest of this year. The corresponding cuts in spending for the U.S. Department of Defense is going to hit many small businesses, as large firms like Lockheed Martin, Boeing and Raytheon who subcontract to thousands of small suppliers cancel some of their contracts. This will make a meaningful impact on jobs in the small business sector.

Despite this, the fact that 25 percent of all small business owners surveyed by NFIB reported an increase in capital spending over the next three to six months is a positive sign. The TD survey also found that about 50 percent of small business owners felt confident they would be in better financial shape this year than last -- although the survey was conducted in late 2012, before the sequester was enacted.

And, while access to credit has been an ongoing problem for many business owners, the number of small companies planning to increase capital expenditures recently inched up, suggesting credit access may finally start to ease in the coming months.

Small businesses who haven’t heard from a financial advisor or banker should consider giving them a call. Talk about ways to look at business differently: How can the business operate with less revenue? What will debt look like? If times call for debt restructure, small business owners would be best to get ahead of it — don’t wait.

With everything that’s in the economic mix right now — the sequester, healthcare costs, taxes — job gains will be slow to recover. But small businesses are a cornerstone of the economy and I’m confident that the entrepreneurial spirit and smarts that define today’s small business owners will allow them to help lead our economic recovery.

Fred Graziano is Head of Regional Commercial, Small Business and Government Banking at TD Bank.

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