The word of the year for 2013 is “sequester” (or the more formal and ominous-sounding “sequestration”).   As you have probably learned, the sequester is the term being used for the mandatory automatic federal budget cuts that took effect as of March 1, 2013.

The sequester calls for $85 billion in federal spending cuts to defense and domestic programs that will occur in 2013, and $109 billion in cuts annually from 2014 to 2021.

Where are sequester cuts being made?

Cuts are being made to the discretionary spending within both military and domestic programs across the board. Although whole programs will not be cut, existing government contracts may not be extended, and new contracts may not be funded. This will affect directly the estimated 35% of suppliers to the US Defense Department that are bona fide small businesses. In addition to these direct suppliers, there are untold numbers of small business vendors that supply prime federal defense contractors. In some cases, these small businesses are so far down the food chain that they may not even be aware of the extent to which that their goods and services ultimately support the US Defense Department.

On the domestic side, as the number of government contracts shrinks and the scope of existing work goes down, both direct and indirect small government contractors may need to reduce headcount and operations. To make matters more difficult, the US Government will no longer extend $902 million in small business loans via the Small Business Administration (SBA), making funds tighter for small businesses.

Will your private sector small business feel the cuts?

Experts vary on their assessments of the impact. Some, such as Professor Stephen Fuller of George Mason University see significant impacts. A recent New York Times article quoted Fuller as saying that 1.4 million private sector jobs will be lost and that half of those will be from small businesses[1]. Other experts feel differently. In that same article, Holly Wade, senior policy analyst at the National Federation of Independent Business (NFIB), was much less pessimistic, stating that “few small businesses have contracts with the federal government, and few small businesses get loans from the S.B.A.” According to Wade, if credit is a problem for Main Street, it will be due to a downturn in the economy more than a drop in federal programs under a sequester budget.

A downturn in the economy cannot be treated lightly, however. Even if you don’t do business with the federal government directly or indirectly, your customers may be affected, and these effects could trickle down. People will lose jobs. Some full-time workers will become part-time. Agencies will shift to bring overhead down, and as they reduce operations, suppliers will cut staff and investment. That means pink slips, lower travel budgets, perhaps fewer conferences, and leaner service offerings. Consumers will have less money to spend and therefore, will shop less. If this is the case, it will be harder for the private sector to grow, or even to hold on to what they’ve got. Small businesses, even more than the Lockheed Martins of the world, have little leeway to maneuver to stem the pain. Do you agree? What’s your prediction? Has your business been affected by the sequestration?