3 Ways the Debt Ceiling Hits Small Business

NEW YORK ( TheStreet) -- The deadline for raising the debt ceiling is swiftly approaching, and while headway was made with Tuesday's so-called Gang of Six plan, created by a bipartisan group of six senators, most doubt the proposal will be passed as is.

The debt ceiling is the amount the U.S. government is allowed to borrow at any given time. It's capped at $14.3 trillion, a figure the U.S. has essentially reached. Congress needs to approve a raise to the debt ceiling by Aug. 2 or risk defaulting on debt, services and benefits for U.S. citizens.
As the deadline ticks nearer for a default on U.S. debt, small-business officials find cause for hope and alarm.

Such votes occur regularly, but this year Republicans have dug in on several underlying issues, alarming economists and rating agencies such as Moody's ( MCO) and Standard & Poor's as the deadline ticks nearer. Of course there are also reasons for small businesses to be concerned about the default.

"The consequences of that are what concerns our members -- the potential for higher taxes and how does that impact government services over the long haul? They want Washington to have some fiscal responsibility," says Bill Rys, tax counsel at the National Federation of Independent Business.

>>>Likely Debt Debate Result: Spending Cuts

Here are three ways the outcome of the debt ceiling debate could directly affect small businesses:

1. Getting a loan will be even tougher.
As if getting a bank loan isn't hard enough these days for small businesses, if the government places a large cap on spending or, in a worst-case scenario, the debt ceiling does not get raised, new loans will be even tougher.

"The bottom line is the raising the debt ceiling is as inevitable as taxes and death," says Jeff Stibel, CEO of Dun & Bradstreet Credibility.

If the debt ceiling doesn't get lifted, "this would be a cataclysmic even for small businesses," Stibel says. "What's going to happen is U.S. credit is going to get downgraded, which means access to credit is going to get much harder and interest rates are going to skyrocket."

To get a bank loan "will be harder and the terms would be so onerous that it just won't be palatable," he says.

Federal spending last year amounted to approximately 24% GDP -- a level not seen since World War II, the National Small Business Association says.

"If we continue to run high deficits, increased interest rates and constricted credit will negatively impact small businesses' ability to garner financing, the lifeblood of every small firm," it says.

2. Tax increases
The general consensus of the Gang of Six proposal is that it's so complicated "there is no hope of getting it passed by Aug. 2," says Mark Luscombe, principal federal tax analyst at CCH, a consultancy specializing in tax and business law.

If it does pass, now or eventually, some initiatives from the proposal include lowering individual and corporate tax rates, but "we don't have any limit on the AMT to the extent that these are pass-through in self-employment situations," Luscombe says, referring to the alternative minimum tax. "Those could benefit small businesses."

>>>How to Prepare for a Tax Hike
There is also the issue of whether the Bush-era tax cuts -- extended by Obama into next year -- will be extended again. "We don't know if the lower individual rates means just retaining the Bush tax cuts or perhaps something even lower than that," Luscombe says.

The lower rates are likely to be offset by reductions in deduction limits on such things as health insurance, charitable giving, homeownership and retirement, he warns.

Limiting the deduction for health insurance "might be viewed as reducing small-business interest in providing health insurance to employees," Luscombe says, but "there's nothing in here that I see that would be a direct attack on Obamacare."

Some small-business lobbyists see those as tax increases, or worry that a suggested decrease in tax revenue from the richest and poorest will be made up in other ways on the backs of their constituents.

The NFIB is among those, and Rys says small-firm owner confidence continues to dwindle with the combination of "fewer customers coming in the door, sales are way down and talk from Washington about a tax increase." The combination, he says, is "not instilling confidence in them."

3. Possible increase in government contracts
Raymond J. Keating, the Small Business & Entrepreneurship Council's chief economist, says if the government is serious about getting spending under control, it should look to contract in areas it hasn't been, presenting an opportunity to small, qualified businesses as it's already done at the state and local levels.

"If it's done correctly then you can make the case that this is an opportunity" for private small businesses, Keating says.

The federal government already does a fair amount of outsourcing to small firms. According to Leonard Gilroy, director of government reform at the Reason Foundation, small-businesses make up about half -- but about 20% of the total dollar amount -- of government contracting.

Gilroy says there is plenty of room for more outsourcing to small businesses in areas such as maintenance, landscaping and janitorial duties at the thousands of federal buildings spread across agencies throughout the country.

While "there is nothing sexy about maintaining government buildings," Gilroy says, naming contracting opportunities such as security, HVAC maintenance and window cleaning, "it's this kind of stuff that presents an opportunity and is a good fit for small businesses."

For the government it presents an opportunity for cost savings and, frankly, better and longer-term management of federal buildings, he says.

The U.S. Forest Service is already outsourcing retail and recreational activities to private retailers, but there may also be more opportunities for recreational services run through federally owned land, Gilroy notes, with more agencies and land put to revenue-generating use.

"Instead of the government actually spending money to have this stuff operate, they're flipping that equation and taking it off their books and generating revenue," he says.

No matter how the debt ceiling debate ends up, it is sure to become a hot topic in the 2012 elections, says Keating of the Small Business & Entrepreneurship Council.

"In a best-case scenario, you get some sort of firm cap on the spending side. Small businesses would be planning under the scenario that we know federal spending over X number of years is going to come down. So you've got some less uncertainty and that would be a positive for small businesses," he says.

"The worst case: The debt ceiling keeps going up, there's no substantive change on the spending front and you can throw in some tax increases," he says.

-- Written by Laurie Kulikowski in New York.

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