Editor’s Note: Small business owners are facing no shortage of challenges. Inflation remains a concern, global conflicts continue to disrupt supply chains, hiring remains complicated, and advances in AI are reshaping the workplace. At the same time, consumer spending patterns are shifting, forcing businesses to rethink everything from pricing to inventory management.
To help make sense of today’s rapidly changing environment, I asked Ben Johnston, COO of Kapitus, to share his perspective on the economic forces shaping small business decisions—and what owners should be watching in the months ahead. —Rieva
Inflation, Energy Costs, and a K-Shaped Economy
While inflation affects all consumers across nearly all goods, it is not impacting all consumers equally. We now live in a K-shaped economy where the wealthy minority drives growth in consumer spending, and everyone else struggles to make ends meet. The recent inflationary spike, driven by higher energy prices due to the War in Iran, is exacerbating this problem.
Wealthy consumers are relatively immune to higher energy costs and their impact on the goods they purchase, while less wealthy consumers see more of their discretionary income going to operating vehicles and buying groceries. The result is a bifurcated market for small businesses to target, where one customer group continues to demand premium-quality goods and services, while the other seeks value and ways to reduce expenses.
Supply Chains Remain Vulnerable
Supply chains have been unstable ever since COVID-19, when demand shifts, production challenges, and labor shortages sowed chaos throughout the world. Since then, global conflicts in Ukraine, the Red Sea, and the Strait of Hormuz, the drought in the Panama Canal region, and a stuck tanker in the Suez Canal have combined to wreak havoc on international shipping. With Iran’s recent success in closing the Strait of Hormuz, the fear is that more militant actors will emerge with the goal of disrupting global trade in search of profit.
One of the industries most dependent on oil and gas prices is transportation, which includes long-haul and short-haul trucking and local delivery services. Fuel oil is one of the transportation industry’s primary operating expenses, and operators feel the impact of this disruption immediately.
The agricultural industry is also highly exposed, given the diesel-powered heavy machinery used in production, the distribution costs to get products to consumers, and the fertilizer needed to maintain crop yields.
Many small manufacturers also have significant exposure, as oil and gas are often used directly in the manufacturing process to generate electricity that powers plants and equipment or in the production of raw materials such as plastic, aluminum, and steel.
In addition, the construction industry has significant exposure to the petroleum markets, given the heavy machinery used during the construction process and the building materials required in modern construction.
The restaurant industry will also experience higher fuel oil and cooking gas costs, as well as higher food costs due to higher transportation and production costs.
Hiring, AI, and the Future Workforce
Small business owners are taking a cautious approach to expansion, given today’s economic environment. They are testing new markets on a small scale and confirming demand before investing heavily in new strategies. They’re also looking for automation and AI solutions to reduce headcount and their dependence on volatile labor markets.
The current economic environment is uncertain. On the one hand, unemployment remains low, consumer spending remains steady, and low taxes and technology advancements are helping some businesses grow profitably. On the other hand, a volatile tariff strategy, elevated oil and gas prices, supply chain disruptions, and a rapidly changing technology landscape combine to create tremendous uncertainty for small business owners.
Despite uncertainty around tariff policy, unemployment remains relatively low at 4.3%. While this is up nearly 1% from the unemployment lows set in 2023, we believe the economy is near full employment.
However, with new advances in AI technology and a trend toward automation, we expect the labor market to weaken in the coming years as new technologies displace workers faster than new jobs can be created. Ironically, weakness in the job market may be an opportunity for small businesses that rely on the availability of affordable labor to staff roles that are often hard to automate.
We expect interest rates to remain at current levels or perhaps decline slightly over the next year, creating a stable interest rate environment for small businesses to plan around.
Understanding Today’s Consumer
Consumers feel less certain about the future than they did in years past. Home and education costs are at historic highs, and labor participation is low by historical standards. Today, there is a wider wealth gap than at any time since World War II, and workers are increasingly concerned about the future of their employment, given technological advances in automation and AI.
As a result, small businesses should tailor products for the specific consumer segment they are trying to reach. Affluent consumers are spending heavily on luxury items, while less-wealthy consumers are buying lower-cost items with high utility and value. It is important for small business owners to know the difference and design products accordingly.
Businesses serving that less affluent client base are looking to lower the cost of their goods and services while still providing a basic level of service.
- Restaurants may choose to swap out organic or farm-fresh menu items for frozen or more highly processed substitutes.
- Technology retailers may stock up on refurbished computers and phones rather than market new inventory.
- Retailers may also partner with buy now, pay later (“BNPL”) firms to help customers finance their purchases.
Small businesses should focus on customer demand, cost of goods, operating expenses, and cash flow. Finding a dependable market at prices that are sufficient to cover the cost of the business is critical in a volatile market like the one we are experiencing today.
Companies operating in this environment should also maintain several financing relationships to support growth and manage cash flow volatility. Having options in difficult times is critical to managing a durable business.
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business finance. Kapitus provides growth capital to small businesses and has provided more than $8.5 billion to over 50,000 small businesses since 2006.
Kapitus offers multiple loan products for small businesses, including SBA loans, revenue-based financing, equipment financing, cash-flow factoring, revolving lines of credit, and invoice factoring.
Photo courtesy Planet Volumes for Unsplash+