Top 5 Economic Factors Affecting SMBs in 2024

The global economy has had its ups and downs in the past few years, bearing the impact of the pandemic, supply chain disruptions, and energy price rises (to name just a few). The U.S. has seen record inflation levels, which in turn brought about repeated interest rate hikes by the Federal Reserve. 

However,  small and medium business (SMB) owners are starting 2024 feeling more upbeat than last year. Goldman Sachs has said 75% of SMB owners are optimistic about their financial trajectory, compared to 68% in 2023. The same survey also found 62% of owners expect profits will increase this year.

Yet, as is the case with running a business, challenges thrown their way are hard to predict. Other data suggests that although many SMB owners expect a more stable financial year in 2024, they remain uncertain about inflation in particular. In this article, we’ll examine five key economic factors that will shape U.S. business performance this year, exploring their potential impact on SMBs in particular.

What Are Economic Factors?

In basic terms, the economy is the system we all inhabit through which goods and services are made, bought, and sold. Businesses selling goods and services, and buying goods from suppliers, are the economic air that we breathe. When an economy is performing well, all businesses ought to see the benefits: consumers have plenty of disposable income which they spend on goods and services, meaning businesses have more liquidity. 

SMB Economics: Explained

Small businesses, which make up 99.9% of businesses in the U.S., are an essential part of the economy. They contribute to 43.5% of America’s GDP, and employ almost 50% of the workforce. 

During economic booms, unemployment is usually low, which contributes even more to the number of consumers spending—because they have a salary to spend—and this is often spent on small businesses.

During slower periods and economic decline, this changes: consumers spend less and this leads to drops in revenue for SMBs. This makes it harder for businesses to repay creditors and qualify for loans needed to boost business growth. It’s not simply about boom or bust either: there are several market conditions that make financing small business growth challenging.

Top 5 Economic Factors Affecting Business in 2024

Since the pandemic, businesses of all sizes have faced several challenges simultaneously: lockdowns and the end of the pandemic stimulus, higher interest rates and rising delinquency rates (late payments). Polls show the latter has been a particular pain point for SMBs in particular in the recent past.

This has resulted in a focus on resilience and thorough strategic planning, which remain key considerations in 2024 despite positive changes to the economy seemingly appearing on the horizon. With this in mind, here are the top economic factors to keep in mind when planning financing for small business in the year to come:

     1.  Recession isn’t completely off the table

Businesses and consumers have dealt with a range of economic headwinds in recent years, prompting constant fears of a serious downturn. However, since late 2023, the conversation has moved from ‘certain recession’ to a ‘soft landing’. Some economists and investors in fact forecast steady growth over the next 24 months.

It’s true that the risk of recession has diminished: consumer spending has been resilient, and government spending has left GDP and employment growth in a good place. A survey from the National Association for Business Economics in December suggested that the perceived risk of recession is at “50% or less” for 75% of businesses.  Wealth management firm Raymond James, the impact of lower consumer spending will still result in a recession, but this will be the ‘mildest in history’ since there is ‘little excess in the economy’.

     2. Inflation remains a concern

2022 was the year of inflation, where price levels soared to levels unseen in the last four decades. To combat this, the Federal Reserve has repeatedly hiked up interest rates over the last 24 months. 2023 then saw some improvement in the consumer price index (CPI) which measures the prices people pay for goods and services over time, and economic growth was also surprisingly resilient. But business confidence remained volatile, and as we enter 2024 inflation has returned as a concern for SMBs in particular.

Inflation makes business operations more expensive: utilities, equipment, rent, transport. This is significant for SMBs in particular because high living costs, coupled with wages not matching price rises, mean that consumers have less disposable income to spend on items beyond what they need. The companies that bear the weight of these tend to be those just starting out or scaling-up, as their overall demand is more sensitive to demand shocks.

There is a great deal of speculation around whether and when the Federal Reserve will begin to cut interest rates. Some have suggested this may happen in May 2024, but SMBs should not bank on this as certainty—especially since U.S. inflation is currently exceeding forecasts.

     3. Consumer spending may moderate

Despite inflation leading to a drop in disposable income in 2023, on the whole consumer spending  levels remained higher than expected even if it softened in the year’s last quarter (and consumer confidence along with it). Retail sales reached an all-time high, and the economy grew by 3.1% in Q4 2023—the fastest rate in two years. This is likely why many small businesses are currently looking to recruit more workers.

However, some agencies predict that spending levels will moderate in 2024. If this does happen, small businesses in particular should consider taking action to build customer loyalty: discounts, cashback rewards, and payment installments can encourage consumers to keep spending.

     4. Interest Rates

It’s widely expected that interest rates will settle down this year. But despite this welcome change from record levels in 2023, any cuts will leave rates far from the near-zero levels seen in 2020. Tight credit conditions have a disproportionate impact on small businesses, many of whom have been unable to get enough capital to sustain growth in recent months.

Many SMB finance efforts are based on business’s ability to take on term loans, but expensive borrowing depletes many smaller businesses’ working capital levels. SMBs are also less capable of taking on large debt and, because they are seen as less resilient than their bigger counterparts, banks are less likely to provide smaller firms credit access in the first place.

Even if we see interest rate cuts in 2024, this may still be of limited comfort to some. Those SMBs who took out business loans in the early days of the pandemic may have to refinance at higher rates regardless of decisions made by the Federal Reserve.

     5. Supply Chain Disruptions 

The last ten years have seen global supply chains become fundamental to the economy, and were severely shaken during global lockdowns due to the pandemic. The latest U.S. Census found that since the pandemics’ peak, the total number of supply delays has dropped, but logistics processes are still readjusting. 

While supply chains are more stable overall, small businesses remain subject to many related pressures. For example, geopolitical tensions have created supply obstacles, such as the Suez Canal blockage due to armed conflict. Many supply chains are also vulnerable to weather-related disruptions as a result of climate change, like the historic drought and hot seas in Panama leading to reduced maximum ship weights through the Panama Canal

To prepare for potential obstacles like this, SMBs can consider strategies like reshoring (‘local logistics’)to gain more control.

Build Resilience With Small Business Financing Solutions

At Setscale, we’re champions for small business growth. Our team has wide experience in starting and scaling small businesses, which is why we provide a flexible purchase order financing solution to help SMBs grow during tight credit conditions. That way, you can meet demand and prioritize keeping your momentum going.

Find out more about our PO financing solutions, or fill in a request form today to get started.

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