After an incredibly painful ordeal, the United States Congress gave birth to a new piece of legislation last week; the deal averted a debt crisis, trimmed the federal government’s budget by trillions of dollars, increased the amount of money the government is authorized to borrow, and has the potential to impact the lives of millions of US citizens and billions people more around the world.
The real significance of the agreement is yet to be seen and economists have not reached consensus on its ultimate impact. Depending on whose opinion you trust, the deal our politicians reached will make it easier to get a loan or make it more difficult to get a loan; will increase the interest you pay on your loans or save you interest on your loans; will stimulate your sales or depress your sales; will help you to acquire new customers or serve to scare away existing customers; will create more regulation or will simplify regulation. In other words, it is a tangled mess and nobody really knows how it will impact small business.
Here are 8 possible effects and how they may hurt or help small businesses:
1. Slow growth almost certain.
Raising the debt ceiling and reducing the budget without additional government stimulus is likely to slow the growth of the overall economy. Businesses large and small will continue to struggle as long as demand is soft and business budgets are constrained.
2. Cost of capital may increase.
The distinct likelihood of higher interest rates means that small business loans will cost more and that credit will be tightened making loans less available to businesses. Last week’s downgrading by Standard and Poor’s of the US Government bond rating from AAA to AA+ means that interest rates on Treasury notes will go up, and rates for mortgages, credit cards, and business loans will follow. In addition, as long as investors can earn higher returns on T-notes, they will expect higher returns from alternative investments in equities and VC’s may follow suit for similar reasons and expect a higher IRR from their invest,ends in new ventures.
3. Uncertainty may abate.
Investors like stability and the doubt surrounding the debt-ceiling debate removed that from the markets. Once a compromise was reached, investors and consumers could breathe a sigh of relief that should last until the next time around. The positive note from last week’s legislation is, simply, that the matter was settled (at least for the moment) and business can know what to expect, at least in the short-term.
4. Cuts may be slow to come
Another positive factor that came out of last week’s deal is that the actual cuts to the budget will not begin immediately, but will be phased in over several years, ads many as 10 years in some cases. This means that the shock to the economy will be diluted and consumers will not feel the impact immediately. Many businesses will escape a shock of the the kind they experienced with the collapse of Lehman Brothers in the fall of 2008.
5. State and local government cuts may come quickly.
The decreases to the Federal budget will impact greatly on state and municipal budgets. The immediate effect will be deeper cuts locally, including additional layoffs and loss of contracts. Already some governments are reducing pensions to retired workers and this will continue. The result will be to further slow the recovery, reduce consumer confidence, and push many small businesses to the edge.
6. Tax increases may be ahead.
The deal made in Washington creates a “super-committee” which will make recommendations that may include a mix of more budget cuts and additional revenue. Where the revenue comes from is hard to say at the moment, but smart Vegas oddsmakers are probably betting on high income individuals as well as the closing of many loopholes that small business currently takes advantage of. Brace your business fr an increase in taxes over the next few years.
7. More government contracts may increase (or not).
Budget cuts may lead to new outsourcing opportunities for Federal and state governments as thy trim departments, and look for other opportunities to save. Small business that is positioned may be able to take advantage of these opportunities over the next few years.
8. Government contracts may dwindle (or not).
Budget cuts may lead to the cancellation of many programs and the contract associated with them. Small businesses that are dependent on contracts with federal, state, or local governments may find themselves facing severe loss of revenues in the year to come.
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