The Effects of Sequestration on Small Business

The Sequestration deadline passed a week ago and we are starting to see how this will affect our economy, and more importantly, how it will affect small business.  Some of the first announced cuts from the Sequestration action were announced Monday.  This is just the tip of the iceberg.  Leading the way in these initial cuts were:

  • NASA announced $212 Million in reductions for space operations
  • The Centers for Medicare & Medicaid Affordable Insurance Exchange grants announced $44 Million in reductions
  • The DoD announced $31 Million in reductions for the acquisition workforce development fund
  • NIST is reducing scientific and technical research by $20 Million

These represent the largest of the initial cuts announced and there will be plenty more as time goes on.  The US Navy has already announced many actions that they plan to take.  One small business that is a supplier to the Navy is already cutting back on worker's hours because of the cancellation of maintenance contracts by the Navy:

At ReliAscent we have heard from many of our clients that awards they had previously been notified on have not yet been awarded.  The agencies are playing a waiting game.  We also heard from at least one client that the resinding of the accelerated payments clause (Class Deviation 2012:O0014) has delayed funds owed to them by the government.  One client has even had to take out temporary loans to keep the business in operation while waiting for the delayed payment.  This business was in luck as they had a usable line of credit to keep their business afloat.  Many other small businesses may not have as many options and as the government delays payments they may face severe cash flow issues. 

As the sequestration cuts start to take effect, the uncertainty is just compounded for small business.  There is also the new health care laws that will start to affect small business.  While the law does not apply to firms smaller than 50 employees (firms larger than 50 will be required to provide health insurance to employees) it may well impact the smaller firms.  To be competitive, these smaller firms will have to offer health insurance to attract employees.  There has been a slowdown in the number of new employees hired by small business during the last 4 years anyway and this may only make it more difficult to add more employees at this level.  In addition, the insurance industry is already talking about larger than normal increases in premiums for insurance to help mitigate the risks of smaller insured pools.  Again, this cost will be more difficult for small business to absorb.  The employment gains over the last couple of years has been about 8% for large companies (more than 1,000 employees) but has only grown 3.4% for small business during the same period.  There is evidently a real risk and more uncertainty for small business in this climate.  Sequestration, health insurance uncertainty, continuing resolution for FY2013 and delayed formation of FY2014 budget create a lot of uncertainty for small business.