The last three years have tested the strength and resilience of America’s small businesses. While there are signs that economic conditions are improving, inflation has fallen faster than expected and the labor market continues to add jobs, SMEs are facing higher interest rates in 2023 and the threat of a looming recession. , and may feel the pinch of a persistent labor shortage. According to Peter Baumgarden, Koch’s Family Professor of Business, Olin, of the University of Washington in St. Louis, who teaches family-owned practices at his School of Business.
“Small businesses are a key driver of the U.S. economy, accounting for two-thirds of net new jobs and nearly half of U.S. economic activity,” said Baumgarden, who is also director of the Koch Family Business Center at Olin Business School. says Mr.
“Understanding and addressing the challenges facing SMEs is key to fostering long-term economic recovery. We can also do this by giving them a framework to know how to approach this market with agility.”
Challenge 1: Rising interest rates
In 2022, the Federal Reserve will hike interest rates sevenfold to a 15-year high in an aggressive attempt to combat inflation. Further hikes are expected in 2023.
“Rising interest rates will be one of the biggest challenges for small businesses across sectors as they limit access to capital that was relatively easy to obtain in the past,” Boumgarden said. rice field.
Boumgarden said as borrowing costs rise, many small business owners will reconsider plans to expand or underwrite large projects that traditionally require an infusion of business loans. increase. In some cases, these projects may put him on hold until 2023. Alternatively, you may look for other ways to fund your project, such as investing in your existing cash reserves.
“Many privately held companies will have to choose between prioritizing growth, liquidity or management, and changes in access to capital can also change that decision point.”
Challenge 2: Economy
Some economic challenges (especially inflation) are not felt equally across the industry.
“If we hit the headwinds of a recession, we need to consider how sensitive consumers are to these pressures and how they affect their buying behavior,” said Boumgarden.
In general, the industries big and small that will be hit hardest by a recession are real estate, construction, manufacturing, retail, leisure and hospitality, Boumgarden said.
“What makes these industries particularly vulnerable is that consumers are more sensitive to price changes. “Everything can affect your top line,” he said.
Restaurant owners, for example, are already feeling the effects of higher food prices and higher wages, he said. Relatively low profit margins often force them to increase menu prices. But that means cost-conscious consumers will have to make choices such as eating out less or opting for cheaper chains.
“If buyers don’t want to pay more, they have to consume a higher cost of goods and therefore have to live on tighter margins. means that a game of chess should be played on how it will affect the financial results of
Challenge 3: Labor
“I’ve heard complaints like, ‘No one wants to work anymore,’ but the real problem is more complicated,” says Boumgarden.
“Research by the Brookings Institution shows that many systemic issues, including declining immigration, lack of childcare, under- and unequal investment in talent, and discrimination affect the labor pool available to small businesses. Small businesses can do small things to address these issues, but policy innovation is also needed.”
According to a recent Bloomberg survey, economists believe there is a 70% chance of a recession in 2023. Ironically, this could prove beneficial to low-wage employers who are most affected by the current labor shortage. A recession will tend to push more people into the job market, cooling rising wages.
Small Business Benefits
Next year will definitely be a challenging year. However, small businesses have some advantages over large companies. Boumgarden said playing the cards right could lead to less confusion next year. First of all, small businesses have the advantage of being agile. This is a skill that many have acquired during the pandemic.
“Being free from bureaucracy, small businesses are often able to experiment and pursue new opportunities more easily,” says Boumgarden. “If I were a small business owner, I would ask what small-scale experiments you could do in the next six months to address the headwinds ahead.”
“Compared to public companies, smaller private companies also have the advantage of being given time to develop business plans with a longer time frame to achieve performance. We are not gasping for immediate returns, so we have the potential to benefit from this patient capital, and in a recession this can be a huge advantage.”
Small businesses have another invaluable advantage over large companies. It is the trust of society.
“Consumers are becoming more and more skeptical and critical of big companies, especially big tech. Boumgarden said.
“The opportunity for small businesses is to find ways to stand out and use that trust to differentiate themselves from larger competitors. Amazon may be able to offer two-day shipping, but your local bookstore can offer personal touches like personal reviews and community meeting spaces. We want to know that we are supporting a business that supports our community, and the opportunity for these owners is to leverage their trust into their business.”
Local communities can help
“Building local support groups to help share best practices is one way local governments and business communities can help small businesses thrive,” says Boumgarden.
“The research is also very clear about the value of educational interventions, so finding ways for universities to support the educational needs of these companies to increase their ‘professionalism’ is critical to the economic growth of these companies and, in turn, our can really boost economic growth in the region. ” He said.