Small firms suffer impact of wrangling over deficit

Sitting in his office, Vince Fudzie, CEO of a general contracting company in Dallas, says business with the government has been shrinking since 2006, and the cliff presents yet another challenge.

MINNEAPOLIS — More than 1,000 miles from Washington, D.C., Marie DeNicola's small business is already experiencing the consequences of lawmakers’ inability to compromise on the budget.

If Democrats and Republicans don't come to a consensus soon, a combination of billions of dollars in tax increases and budget cuts will go into effect Jan. 1. This “fiscal cliff,” as it is commonly being called, is already hurting Ms. DeNicola's company Mainstream Boutique, a Minneapolis-based chain of 23 franchise stores that sell women's clothes. Ms. DeNicola recently got a painful e-mail from a prospective franchisee who said that she changed her mind about opening a store because of uncertainty about the economic and political climate.

“It was like a punch in the stomach,” says Ms. DeNicola, who also operates one of the stores. “It's a little scary — because of the unknown, small businesses aren't waiting until January or February to see what happens. People are reacting now.”

Going over the cliff could have a range of negative ramifications. If people have to pay higher taxes, they likely will spend less. Businesses will hold off on hiring or making investments that could help them expand. Federal budget cuts will put billions in government contracts in jeopardy. Economists and lawmakers warn that without an agreement, the U.S. could slip back into a recession. And they say that small businesses have the most to lose.

Like her potential franchisee, Ms. DeNicola is holding off on big moves because of the cliff.

“We're waiting to see what happens before we decide on hiring. I can't continue to invest in the business until I know what's going to happen,” she says.

Small business owners who rely on federal contracts are worried about how much business they'll get from the government if big spending cuts go into effect. Vince Fudzie, CEO of Triune, a general contracting company based in Dallas, says business with the government has been shrinking since 2006, and the cliff presents yet another challenge. He's already been waiting to find out if he'll get approval to finish a dormitory project for the Department of Labor that's 95 percent complete.

If no agreement is struck, Mr. Fudzie says he'll have to re-evaluate his business and see if it can find new niches to fill.

“Even in a bad economy, there are pockets that are doing better. We have to figure out, what are we good at?” he says.

In the meantime, he's frustrated by lawmakers’ inability to reach a deal.

“We elect these seemingly reasonable people to go to Congress and they seem unwilling to get along,” he says.

Another big concern for small merchants is the pending expiration of the 2 percentage point cut in payroll taxes that gave consumers more money to spend in 2010 and 2011. If the tax cut isn't extended, the government stands to get $95 billion — money that consumers won't be spending at Mainstream Boutique and other small businesses. Long-term jobless benefits will also expire, giving people who have been out of work for a long time $26 billion less to spend.

The prospect of consumers spending less troubles Greg Jones. The owner of three Five Guys Burgers and Fries franchises in Florida is concerned that customers who might normally stop in three times a week will cut that back to once. Restaurants like his lost business to cheaper options like McDonald's during the recession. He's worried that will happen again. Mr. Jones wants to open two more Five Guys locations, but says he might not be able to if the country goes over the cliff. If his existing restaurants aren't profitable enough, he won't get the money he needs to expand.

The consequences that Mr. Jones faces are a big part of why Georgia Institute of Technology professor Thomas Boston says he thinks the fiscal cliff could do enough damage to small businesses to halt the economic recovery.

“They're just now recovering, really growing in any kind of significant way since the recession,” Mr. Boston says. “The job creation we've seen over the last five months, that creation has been located overwhelmingly in small businesses.”

The stalemate in Washington has kept Arthur Cooper from making big decisions about his Randolph, N.J. Internet marketing company, Optimum7.

Mr. Cooper expects Congress to do what it has done many times in the past — come up with a stopgap measure and defer significant decisions until six months or more into the future. That would keep him in limbo while he waits to see if lawmakers will eventually agree on taxes and a budget.