Economic uncertainty is a challenge no business owner can ignore. Inflation, rising interest rates, and fluctuations in the labor market have created a complex environment, especially for small businesses and entrepreneurs. Navigating these turbulent times requires more than resilience — it calls for strategic adaptability and informed decision-making.
Here, we explore the primary challenges small businesses face today and share insights from Ben Johnston, Chief Operating Officer of Kapitus, a small business lender and marketplace. We also outline actionable strategies to ensure your business not only survives but thrives in this uncertain economy.
Current Economic Challenges
Small businesses are grappling with a trifecta of economic difficulties, each posing unique challenges and risks.
Inflation and Interest Rates
Businesses are still feeling the effects of the inflation spike from 2021-2022 paired with elevated interest rates. While the economy may have avoided a recession, the Federal Reserve’s efforts to curb inflation have driven up the cost of capital.
According to Johnston, “Small businesses must contend with elevated interest rates and a customer base that remains cautious after years of price increases.”
This combination creates a double-edged sword. Businesses face higher borrowing costs while customers are now more price-sensitive than ever.
Tight Labor Market
The U.S. labor market remains tight, with low unemployment and rising demands for competitive pay. For small businesses, this means fierce competition to attract and retain talent.
Johnston explains, “Small businesses are struggling to find quality candidates at prices their business can afford, particularly for part-time and seasonal employees.”
Tariffs and Global Supply Chain Disruptions
Tariffs and supply chain disruptions continue to affect the cost and availability of goods.
Johnston notes, “Short-term, higher tariffs can drive inflation and disrupt the global supply chain,” forcing businesses to absorb extra costs or pass them along to consumers.
Expert Strategies for Thriving Amid Uncertainty
Though the challenges are real, so are the opportunities. Below are tailored strategies, bolstered by Johnston’s insights, for navigating through these uncertain times.
1. Focus on customer value.
Johnston advises businesses to prioritize offerings that deliver clear, demonstrated value to customers.
“Be judicious in your expansion plans and focus on goods and services that provide a proven return for your customers,” he says.
Before launching a new product or entering a new market, test the waters thoroughly to ensure there’s demand and your pricing aligns with customer expectations.
Actionable Tip: Conduct market surveys, pilot programs, or focus group testing before committing to any new venture.
2. Adapt to tariffs and supply chain issues.
With tariffs shaking the stability of global supply chains, businesses must explore ways to reduce dependency on specific foreign suppliers.
Johnston suggests two potential approaches for navigating tariffs effectively:
- Source domestically where possible to avoid global volatility.
- If domestic sourcing isn’t feasible, work quickly to move production within less-affected regions to mitigate costs.
Actionable Tip: Audit your supply chain to identify vulnerabilities and determine if vertically integrating production is a sustainable solution.
3. Build financing resilience.
Economically uncertain times often come with restricted access to financing. The collapse of several banks in early 2023 has made it harder for small businesses to secure loans, while higher interest rates have driven up borrowing costs.
Johnston recommends maintaining multiple financing relationships to ensure access to capital when needed.
“Having contacts at both bank and non-bank lending institutions can help business owners secure the fastest and lowest-cost capital,” he says.
Actionable Tip: Compare loan options and calculate the return on investment for any borrowed capital before committing. Consider working with non-bank lenders if traditional financing options are limited.
4. Invest in technology to alleviate labor shortages.
Labor market challenges mean businesses need to think beyond traditional hiring. Automating repetitive tasks and upgrading internal processes can help your business operate more efficiently with fewer employees.
“Consider investing in new technologies like inventory management software or customer self-service tools,” Johnston advises.
For key staff, focus on employee retention by offering flexible perks, professional development, and opportunities for advancement.
Actionable Tip: Evaluate where automation can replace manual labor in your operations. Retain top talent by creating growth opportunities and offering flexible benefits packages.
5. Manage costs and pricing strategically.
With rising costs impacting nearly all areas of business, optimizing pricing strategies while keeping customers loyal is key. Transparency can go a long way in retaining customer trust during price adjustments.
Actionable Tip: Communicate openly with your customers about price changes, emphasizing how your quality and value remain unmatched. Additionally, look for cost-saving opportunities in your supply chain or processes without sacrificing quality.
Tariffs and Supply Chains: U.S. Businesses in the Crossfire
Apart from immediate financial challenges, tariffs loom as a disruptive force. The long-term effects of higher tariffs could swing both ways. Although they may incentivize domestic manufacturing, the short-term effects include rising costs and reduced consumer spending.
Johnston explains, “Higher tariffs will certainly cause prices to rise for U.S. consumers and likely spur inflation. Over time, they may protect certain U.S. manufacturers, but retaliatory tariffs could reduce demand for U.S. goods abroad.”
Actionable Tip: Stay informed on the latest tariff changes and align procurement strategies accordingly to avoid unexpected cost spikes.
The Financing Landscape
Since early 2023, securing financing has grown increasingly difficult for small businesses due to bank pullbacks and higher default risks. Businesses with strong credit still have options, but it’s essential to calculate whether the capital cost justifies the potential return.
Actionable Tip: Regularly evaluate your creditworthiness and explore alternative financing sources, such as marketplace lenders, to secure a steady capital flow.
Winning the Talent War
Tight labor markets demand proactive approaches to hiring and retention. Johnston suggests:
- Investing in HR technology to streamline hiring processes.
- Offering competitive perks and career-related growth opportunities for high-value employees.
Actionable Tip: Forecast your staffing needs for the next 12-18 months and align investments in tech and training accordingly.
Thriving Through Change
Economic uncertainty is challenging, but small businesses equipped with the right strategies can turn adversity into opportunity. By evolving operations and and investing in smart technologies, small business owners will position themselves for long-term success.
Despite the current economic challenges, Johnston offers an optimistic perspective.
“Small businesses have always been the backbone of our economy,” he says. “With careful planning and adaptability, they can weather these shifts and emerge stronger.”
