The Wall Street financial crisis is leaving investors scrambling for cash. That means there is less money available to be lent out. Those who rely on borrowed money to finance operating expenditures may be in for a painful dose of reality: In times of crisis, debt reliance can be catastrophic.

The biggest state in the union may be about to realize just that.

California will find out later this week if it is able to borrow several billion dollars from investors. If it is unable to do so, the state faces an uncertain future. Governor Arnold Schwarzenegger has already warned U.S. Treasury Secretary Hank Paulson that the state may need to seek emergency federal funding if it is unable to access traditional debt markets. California needs to borrow about $7 billion before the end of the month, but because of current conditions it will first try to borrow only $4 billion.

“Given the market conditions, we concluded it was best to go only for $4 billion immediately, and try for $3 billion more in a few weeks,” said state finance department spokesman H.D. Palmer.

Over-reliance on borrowing has left several other states in the same boat. New Jersey, Nevada, Rhode Island, Arizona, Delaware, New York, Florida and Alabama all need to borrow money to fund operations. “This is an unprecedented situation because of the scope of the lending needs,” says Alan Rubin, director of federal government relations for Buchanan Ingersoll & Rooney, which has decades of experience in state financing. “If these states can get their funds the usual way and start asking the federal government, there is no clear-cut way for Washington to respond.”

If California is unable to borrow money, it would not only be a dire signal to the rest of the country’s businesses and states, it would be a watershed event for the U.S. economy.

California, if it was a stand-alone country, would have one of the largest economies in the world. After the federal government, states are considered the safest loans out there. If California couldn’t get a loan, what would that mean for companies like General Motors, the airlines and thousands of other big businesses across America? Unless something rapidly changed, it could literally signal the end of corporate America as it is known today.

For now, investors and businesses await the California debt auction with held breaths.

For more insight into this subject, read “The Snare of Debt” by Tim Thompson.