Times are getting tougher for small businesses, Good!

How High-Interest Rates, a Slowing Economy, and Tight Markets Can Benefit Entrepreneurs

You come home from a long day of work, get all of the things you need to do at home done, and now you just want to not think for a while. Often the easiest way to not think involves social media doom scrolling that you regret doing after you’re done. Now and again, however, you do find a nugget of information that makes a positive impact. One such example is a podcast by Jocko Willink, a social media personality and former Navy Seal, who highlights that when things start going bad there's one word that should come to mind, “good”! 

Why are problems a good thing?  The answer is often the best opportunities spring up from problems that need solving. 

It’s in difficult times that entrepreneurs find a new voice, test their grit, and adapt their business models for the markets of tomorrow. Down markets make founders take a sober look at their business and do what is necessary to get their company through to the other side. As the Roman emperor and stoic philosopher Marcus Aurelius once said,  “The impediment to action advances action. What stands in the way becomes the way.” In other words, find the good in whatever situation arises.

Current Market Landscape

In the United States, today's market conditions are muddled, to say the least. There are plenty of things going in the right direction. The S&P 500 is up nearly 15% year-to-date, unemployment is close to historic lows at just under 4%, and third-quarter GDP came in at an impressive 4.9%. Looking at these numbers things seem pretty good on the surface but many financial professionals see trouble brewing beneath the surface and they have reason to. 

Interest rates are the highest they've been in over 20 years, pushing the 10-year treasury yield to 4.6%. The Federal Reserve doesn't plan to lower the federal funds rate anytime soon and we shouldn’t expect a Fed to bail us out of the next downturn, especially if inflation is still hovering around 3%. The days of free money and sky-high valuations, especially in the technology sector, are all but over for the foreseeable future.

Higher for longer interest rates are starting to bite the US consumer and businesses in a real way.  Although recently falling a tad, mortgage rates are hoovering at a 20-year high of 7.5% and according to the New York Federal Reserve - High-Frequency Economics, US auto loan delinquencies are at 7.39% and US credit card delinquencies are at 8.01%, the highest levels since 2017 and 2011 respectively. 

Even if the overall unemployment numbers are holding up well, major job cuts are starting to make headlines. Heavyweight companies such as Meta, Microsoft, Amazon, Goldman Sachs, and Wells Fargo are part of a growing list of Fortune 500 companies that are reducing staff. Oh, and the U.S. now has over $33 trillion in national debt.

Globally the situation is looking even more bearish. China’s real estate was once an engine driver of growth but now seems to be in deep trouble because large property developers and trusts are defaulting on interest loans and defaulting at an alarming rate. US Commerce Secretary Gina Raimondo as recently as August of this year called China “uninvestable” for American investors due to fines, raids, murky regulations, and security risks. Not to mention the ongoing tension between the U.S. and China over Taiwan, Russia, Trade, South China Sea among others, doesn’t bode well for an already weakening global economy.

Unlike the U.S., the Eurozone's latest GDP shows a slight contraction of .01 percent due to confluence reasons like stubborn inflation, energy fluctuations caused by the Russia-Ukraine war, and slowing trade from China, its largest trading partner.  Not to mention the higher global interest rates are impacting emerging and developing markets disproportionately in what the Financial Times describes as a “Silent Debt Crisis.”

Most economists and market participants agree that bad times are coming. Entrepreneurs shouldn’t fret about this, but they do need to plan accordingly. Let’s go find the good.

High Interest Rates - Good! 

High-interest rates can be the catalyst of innovation and creativity among entrepreneurs:

Resourcefulness and Efficiency

Entrepreneurs must learn to do more with less and manage their finances more effectively. There is no better way to achieve this than finding ways to integrate AI into your daily workflows. The next generation of entrepreneurs will have to get on the AI wave or be left at sea. AI can help your business automate processes, lower costs on key engine revenue drivers such as marketing and sales, and provide a laser-focused customer experience. 

There are a slew of articles and companies that can help you get on the AI path. This piece in  pcmag.com gives some solid examples of where to start. 

Financial Discipline

The burden of servicing higher-interest loans encourages entrepreneurs to maintain stricter financial discipline. This promotes better budgeting, improved cash flow management, and a more resilient financial foundation.

Prudent Investment (especially in your time management)

High-interest rates necessitate careful evaluation of the return on investment (ROI) for each project. This encourages a focus on ventures with a higher probability of success, reducing the risk of financial strain.  

The Slowing Economy: Good!

A slowing economy can offer fertile ground for entrepreneurs to plant the seeds of success:

Market Entry Opportunities

In a slowing economy, market dynamics shift, creating opportunities for innovative small businesses to enter markets that may have been dominated by larger corporations or cater to a more niche market. To keep things in perspective, there are a plethora of examples of companies that spawned or recreated themselves in recession.

Upskill/Reskill 

The increased focus on cost-cutting is given outsized attention because it usually is synonymous with layoffs. Another approach would be to take your current employees and teach them new and relevant skills. One of the hardest tasks an employer has is recruiting, hiring, and keeping great talent. If you have an employee who is trustworthy and adaptable, get them the training and education they need to help both your company and themselves be better positioned for the future. 

Snatch Up Talent

When large corporations execute large job cuts they’re often done under the guise of making the company leaner. Closer to the truth it is a short-term measure to bump their share price and keep Wall St. happy.  They often cut more than the fat and go right to the bone in the process. Small businesses can use these job cuts to their advantage by recruiting for positions they need to grow their business. These workers are usually younger and possess the skillset your older employees may be lacking. 

Tight Markets: Good!

Tight markets, characterized by limited resources and fierce competition, can be the spark that leads to innovation and agility among entrepreneurs:

Find Your “Human Voice” 

We know that AI is here and here to stay, but that presents an oldie-but-goodie way of communication, our voices. For all the promise of next-generation technology, the best representation of your company is still you, the entrepreneur. A good handshake, a strong speaker, and a friendly call with a client will become the best way to stand above your competition.

Collaboration and Partnerships

In a tight market, collaboration and partnerships can be key to success. Entrepreneurs can leverage the strengths of others in the ecosystem, whether it's sharing resources, co-developing products, or expanding reach through strategic alliances.

Customer-Centric Solutions

Understanding and responding to customer needs is paramount in a tight market. Entrepreneurs who prioritize customer-centric solutions can build strong brand loyalty and sustainable growth. Harvard Business Review expounds on the importance of embracing empathy and creating more touch points for the client to interact with you.

The takeaway 

The troubling cocktail of high-interest rates, a slowing economy, and tight markets can be a real danger to a company, but for entrepreneurs, it can foster a dynamic landscape brimming with potential. By embracing these challenges, entrepreneurs can emerge stronger, more innovative, and better equipped for sustained success for years to come. In these environments, they discover that hurdles can be stepping stones and that entrepreneurship is not just about thriving during the upmarket but flourishing in the down ones. It’s going to be hard - good!

By,

Jimmy Robinson
Financial Advisor