While consumers have to adapt to inflation in their personal lives, small business owners are among the first groups to feel the impact. Customers become more selective with what they spend and often look toward the goods and services with the lowest prices. These effects are pronounced for small businesses that have tight profit margins to begin with and tend to depend on a local or niche market for their income.
According to the U.S. Chamber of Commerce’s Small Business Index, 55 percent of small business owners say that inflation is their top concern for the health of their companies. Following a similar thread, 26 percent of business owners cite revenue as their second-biggest concern.
When dealing with the effects of inflation, small business owners have to make tough decisions, such as raising prices, hosting sales events or increasing spending on advertising. And in many cases, the problems caused by inflation get transferred to the customer.
Customers will then need to choose whether to stay loyal to the small business or find a business with lower prices elsewhere. Let’s dive into small business issues, how small businesses are responding to inflation and how they keep a loyal customer base in a challenging climate.
Key takeaways
- 55% of small business owners say that inflation is their biggest challenge in today’s economy, according to the U.S. Chamber of Commerce.
- Inflation, uneven cash flow, weak sales, credit interest rates and the political environment are among the top challenges facing small businesses.
- Small businesses engage with customers through feedback, social media, sales events and advertising to boost customer loyalty.
Challenges small businesses face in the current economy
In the past few years since the pandemic and onward, small businesses have had to weather a slew of economic storms. Here are the top challenges small businesses are facing:
Inflation
A hefty 77 percent of small businesses have faced the challenge of rising costs of goods and services as well as wages for employees, according to the Federal Reserve’s Small Business Credit Survey. Plus, 52 percent of small businesses face challenges with simply paying operating expenses.
What’s more, 84 percent of small businesses say that inflation is currently impacting their businesses, according to the 2024 Business Owner Report by Bank of America.
These rising costs of materials and services dips into small business’s profits, leaving them with either less profit or the tough decision to pass rising costs onto their customers. Their ability to pay for these expenses may depend on how high profit margins were before the price of goods rose.
Cash flow
Based on the Federal Reserve’s Small Business Credit Survey, 49 percent of employers faced uneven cash flow in their day-to-day operations. This may include variations in revenue and sales coming in as well as uneven or unexpected costs arising that the small business needs to face head on.
Despite uneven cash flow, small businesses remain positive about their cash flow standing. According to the U.S. Chamber of Commerce, 67 percent of small businesses are comfortable with the state of their current cash flow, and 65 percent believe their business to be in good health.
The main difficulty that business owners need to keep in mind is that they should have a healthy system for managing the ups and downs of revenue in their businesses. Practicing even the most basic elements of small business budgeting can go a long way in ensuring the health of a company’s bottom line.
Weak sales
Fourty-four percent of employers have dealt with weak sales in the past 12 months, according to the Federal Reserve report. The U.S. Chamber of Commerce states that revenue is the second-biggest concern next to inflation for small business owners — and for good reason. Businesses need healthy sales to continue growing, pay operating expenses, invest in marketing, hire employees and more.
Interest rates
Businesses in startup and growth phases often need access to capital to fund their growth and expansion. According to the Federal Reserve data, 29 percent of employer businesses faced challenges with obtaining credit.
The current economic environment has led to lenders tightening credit as well as raising interest rates, making the cost of borrowing high. According to the Kansas City Federal Reserve, new lending for small businesses decreased by 6.7 percent compared to 2023.
While term loans actually saw a decrease in interest rates, lines of credit rates increased. For example, fixed-rate lines of credit from rural banks increased from 8.34 percent in Q4 2023 to 8.68 percent in Q1 of 2024. Lines of credit remain important to small business lending since small businesses can apply before needing funds and withdraw funds later.
Political environment
According to Bank of America’s 2024 Business Owner Report, 78 percent of small businesses are concerned about the upcoming election and how that may affect the small business economy. Seventy-five percent are worried about the U.S. political environment, and over half of small businesses are concerned about the strength of the U.S. dollar and corporate tax rates.
Small businesses may be waiting for the presidential election to shake out before expanding their businesses. The report shows that just 39 percent of small businesses plan to expand in the next year, compared to 48 percent in 2023.
Bank of America states, “Given the uncertain economic landscape and upcoming presidential election cycle, many small business owners are in a holding pattern for 2024.”
How small businesses succeed despite challenges
Entrepreneurs have a history of getting creative and innovating in the face of challenges. After all, the success of their businesses depend on it. Business owners deal with challenges in a number of ways, including:
Customer engagement
Eight-two percent of small business owners have responded to economic challenges by reaching out and engaging directly with customers, according to the Bank of America report. This strategy proves a smart one since keeping loyal customers is paramount to achieving steady revenue. Of those using this strategy, 80 percent employ personalization, customizing the interaction to the specific needs of each customer.
Fourty-eight percent also implement customer feedback in their business operations. These top strategies help businesses interact with customers in a way that resonates with them and fills their specific needs.
Other methods of customer engagement include direct marketing (used by 38 percent of small businesses), sales and discounts (27 percent) and loyalty rewards programs (23 percent).
Obtain funding
Another strategy that small businesses can take to grow their businesses or overcome uneven cash flow is to apply for funding. According to the 2023 Small Business Credit Survey, 40 percent of small businesses obtained funding that needs to be repaid in order to weather financial challenges.
Bank of America’s report states that 71 percent of small businesses plan to obtain funding, but this number is down from 82 percent in 2023. Of those who plan to receive funding, 61 percent plan to use business credit cards, while 45 percent plan to tap personal savings.
The main consideration with receiving funding is that you need a solid plan to manage your business loan. Bank of America states that more businesses are using business credit cards, and unfortunately credit card balances are 20 percent higher than they were in 2019. Use a business loan calculator to ensure that the loan repayments fit into your business budget.
Build and use a contingency fund
You can absorb some of the blow of an unpredictable economy if you have a business contingency fund. You can tap this fund to pay operating expenses during low-revenue seasons, use as capital to expand your business or draw from to pay for an unexpected expense.
According to the Small Business Credit Survey, 53 percent of employer businesses pulled from personal savings to face financial challenges. And 51 percent pulled from business cash reserves to get them through.
However, some business owners may not have the funds necessary to help their businesses through a season of hardship. More than one in three (34 percent) of American workers are living paycheck to paycheck, according to Bankrate’s Paycheck to Paycheck Survey.
To build a solid contingency fund, you will need to save money when you have a surplus, such as saving profits from a big sale that boosts revenue.
Evaluate spending
Bank of America’s Business Owner Report states that 70 percent of small businesses have had to “make tradeoffs” to ensure that their businesses stay profitable amid the economy.
To make decisions on the best strategies for your business, you can evaluate your business’s spending and overall operations to see where you can make adjustments. This can include directly cutting spending, but it can also include improving your workflow to save money.
According to the U.S. Chamber of Commerce’s Small Business Index, 40 percent of small businesses have tried AI tools and another 49 percent say they will try AI tools within the next year. Businesses may be evaluating whether they can streamline operations using AI to help their businesses succeed.
Raise prices
Finally, business owners may need to raise prices to make running their businesses sustainable. Businesses may need to keep a close eye on their profit margins and ensure that they are making enough profit from each sale to maintain profitability. If not, they will need to take action.
Bankrate insight
Americans now believe that they need to earn over $186,000 per year on average to feel financially secure or comfortable, as found in Bankrate’s Financial Freedom survey. To boost personal income, more than a third (36 percent) of Americans have a side hustle to supplement their living, according to Bankrate’s Side Hustles Survey.
When setting financial goals for your business or side hustle, you will need to decide what is a comfortable salary as well as consider your business expenses.
How to support small businesses
Small businesses are the backbone of America, significantly contributing revenue and jobs to the economy. Together, we can support small businesses by:
- Buying local. Aim to buy from local supermarkets, clothing stores and restaurants, rather than relying on big box stores. See if you can implement buying local in your everyday life rather than just during holiday seasons.
- Spreading the word. Tell your friends and family about your favorite local businesses and help others find the goods and services they need through your referrals.
- Signing up for notifications. Sign up for a local business’s email list or follow them on social media so that you can be aware of sales and events going on. That way the small business stays top of mind when you have a need or have a chance to buy goods or services on sale.
- Leaving reviews. New customers are more likely to buy a product or use a service if it has a solid reputation from previous customers. Help customers find quality products by leaving honest reviews, especially when you have a good experience, to help others make the decision to buy from that business.
The bottom line
Anytime the economy takes a hit or inflation soars, small businesses feel the brunt of the rising prices and tight profits. Many small businesses face challenges for everything from higher cost of goods and increased wages to high business loan interest rates. The good news is that small businesses can implement multiple strategies to help them through the financial storms.
By engaging with customers and employing marketing that drives customer loyalty — as well as other strategies like getting a working capital loan — small businesses can come out on the other side in healthy shape.
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