Unless you find yourself successfully operating in a niche market, the business world is a competitive place. Every step owners and operators can take to secure and stabilize their enterprise is always a good idea — ensuring reliable, predictable, secure, and seamless payment processing with the experts at Clear.Charge.Solutions is a prudent start! Entrepreneurs can also help protect their businesses by anticipating and preparing for future economic or social trends that may impact them. Here are three to consider for 2024.
The new year has begun, and the U.S. economic situation has generally been solid now that the worst days of the pandemic are in the rear view mirror. However, small business owners should always look forward and be on the alert for outside considerations that could negatively impact their companies.
While the Federal Reserve has hinted at possible interest rate cuts this year, we don’t know for sure. Trade has rebounded nicely as supply chain disruptions subsided, but international events could change that in a hurry. And, despite a strong holiday season and some good signs in the economy, the threat of a recession always looms.
As I see it, there are three things that could most hurt the outlook for small businesses this year.
1. Continued High Interest Rates
After almost two years of interest rate increases, Fed Chair Jerome Powell signaled towards the end of 2023 that the central bank could start cutting interest rates in 2024, providing that inflation continues to fall.
While the statement raised expectations that rates could drop, there is no guarantee that it will. The Federal Open Market Committee (FOMC) makes its decisions on interest rate hikes based on numerous economic factors, including inflation numbers, employment figures, and overall economic conditions. Chair Powell has repeatedly stated that the Fed’s target inflation rate is 2%, and we are not there quite yet. We may have more clarity on January 30-31, when the next FOMC meeting is scheduled.
Meanwhile, the latest Jobs Report from the Labor Department found surprisingly strong hiring in December. The U.S. economy added 216,000 jobs in December, signaling a still strong labor market. Unemployment held at 3.7%, a figure that signifies nearly full employment in the economy. Since the labor supply is tight and the demand for workers (as evidenced by job creation) remains high, wage pressures will continue for business owners. This pushes their overall costs higher.
Should businesses borrow money in 2024?
Deciding whether your business should borrow money depends on a number of factors, and interest rates are just one of them. If you are concerned that rates are too high and that you might not be able to make the payments, you might consider holding off from borrowing. But there are other factors, beyond the cost of capital, to consider.
Purpose of Borrowing: If you need the funds for an opportunity that might go away, such as buying a business that is up for sale right now or purchasing or repairing vital equipment, then the reason for borrowing is a big consideration. If your company is on a growth path, you may not want to let interest rates hold you back.
Return on Investment (ROI): Evaluate the potential return on investment for the borrowed funds. Will the investment generate enough income to cover the cost of borrowing, including interest payments? If the ROI is positive, it might make sense to borrow, providing that your company has the financial capacity to meet debt obligations without compromising day-to-day operations.
Economic Conditions: While interest rates are important. If the economy is strong and your business is poised for growth, borrowing may be more justifiable. However, if economic conditions, including your own business forecast for 2024, are less rosy, then caution may be warranted.
Risk tolerance: If interest rates remain at their current rate or increase in the short term, would your business still be able to cover the debt?
Ultimately, the decision to borrow money should be based on a comprehensive analysis of your business’s financial situation, goals, and the economic environment. If in doubt, it’s always advisable to seek professional advice tailored to your specific circumstances.
2. Geopolitical Uncertainty
Geopolitical events, such as China’s increasingly aggressive behavior toward Taiwan, the war in Ukraine, and the hostilities between Israel and Hamas, can significantly impact the supply chain and the U.S. economy.
Geopolitical tensions can lead to trade wars and the disruption of the flow of goods and services across borders, which may cause shortages of raw materials and delays in production, thereby increasing the cost of imports and exports and leading to higher prices overall. We have also seen how increases in energy prices in oil-producing regions can fuel inflation by driving up transportation costs. Higher costs naturally affect the economic success of businesses.
3. Recession
The Fed’s efforts to cool inflation seem to be working, albeit not as quickly as many economists would have liked. The central bank’s stream of small but steady interest rate hikes have curbed inflation and may indeed produce the “soft landing” that economists had hoped for. However, we saw during the pandemic that unforeseen circumstances have the potential to cause a global economic slowdown.
Many small business owners worried about recession during the pandemic and did so even through last year. While the U.S. economy has remained fairly solid, the possibility of a recession is still something that business owners must consider in their own long-term planning.