Original article published at Forbes.com.
I asked these five experts about the small business sector and it’s relationship with the market and here’s what they had to say:
What effect, if any, does the current stock market fluctuations have on small business and small business lending?
- Karen Mills: One thing we know from the past 6-8 years is that uncertainty in the economy does create real stress for small businesses. Even after the recession officially ended, uncertainty over the next several years — sometimes due to gridlock in Washington and other times because of other types of global market factors — would create challenges for small businesses. So a situation like we are seeing with the stock market currently is yet another instance where small businesses must navigate real and perceived hurdles in many forms. Access to credit for small businesses can also tighten in turbulent times as lenders become more wary and worry about the creditworthiness of their smaller customers.
- Rob Frohwein: Right now we are not seeing a major impact on our small businesses. If volatility continues, it could impact consumer confidence which could, in turn, lead to some SMB challenges.
- Ryan Rossett: Any pullback in the equity markets — whether real or perceived — has potential effects on how consumers spend their money. However, a blip in the market shouldn’t derail a small business owner’s ability to grow.
- Ethan Senturia: It’s unlikely that the current stock market volatility will have much direct impact on day-to-day small business operations or lending. These fluctuations come on the heels of a relatively steady and uninterrupted increase in stock market indices over the past five years that has been supported by underlying strength in the domestic economy, low inflation and interest rates, and improving unemployment rates. Much of the recent turmoil was more of a ripple-effect related to corrections in foreign stock markets, than anything related to weakness in the US. Small businesses are much more sensitive to growth and stability in their local economies and, in the US, all signs are still pointing in the right direction. In fact, the market drop may positively affect availability of capital for small business lending. Stock market volatility can make investors generally skittish about the market and prompt them to look for alternative assets that can earn attractive yields without the ups-and-downs of the stock market. Small business loans fit this bill neatly and therefore could attract even more investor appetite in the coming months.
What effect does a long term market slide have on small business?
- Bob Coleman: Long term stock market declines devestate Main Street. Consumers panic and keep their wallets and purses at home. How quickly we forget 2008 and 2009! The great recession devastated Main Street. Not Wall Street, General Motors, or AEI, who all got bailouts. Main Street did not. Every Main Street in every town had shuttered businesses that lost jobs, lost community tax revenues, and lost dreams.
- Rob Frohwein: The market moves in cycles – we all know that. Currently we are 4 years into a meaningful expansion of the economy and I believe that we are 2 to 3 years away from a more likely contraction of the economy. It’s actually been an interesting cycle for our economy – typically we’ve seen cycles that are 5-6 years long – this one appears as though it will be 7-8 years. We’ve also seen less overall exuberance – the highs don’t get too high and the market is quicker to react to challenges and bring a check to the overall economy. I hope this portends good things for our cycles – perhaps shorter and less dramatic than in the past. However, no doubt that a retracting economy hurts small businesses. And it’s a good thing the stock market is not always a real reflection of what is happening on the street. Since many Americans’ pensions and 401Ks are directly tied to the U.S. equity markets, their net-worth could shrink as the market retreats, leading to a hesitancy for American consumers to spend. The last economic downturn helped us identify certain industry sectors that were more affected by a reduction in discretionary spending. By leveraging our data science and predictive analytics capabilities, we can identify new opportunities within those sectors — a shift in spending from higher-end restaurants to mid-tier restaurants, for example.
- Ryan Rossett: Keep in mind that the most recent long-term market slide reduced the supply of capital to small businesses from traditional lenders more than the reduction in consumer demand. That created opportunities for thoughtful, data driven lenders to provide access to working capital and a better user experience than traditional banks were offering, and those opportunities still exist today.
- Ethan Senturia: Many small businesses, such as restaurants and retailers, rely on consumer spending to generate revenue. When stocks slide long-term, household wealth deteriorates (as do expectations of future wealth) and consumers start to forgo discretionary expenses, which could impact the growth potential of some small businesses. Even B2B companies could be impacted as their client base might push off investments or large purchases. The other potential negative impact of a long term equity market slide could be a tightening in the credit markets. If banks and other fixed income institutional investors believe that the economy will slow as a result of the equity market slide, they could decide to pull back in their lending to small businesses and alternative lenders that make small business loans. This could make it more expensive for small businesses to get new financing for expansion and growth. A long term market slide can create some challenges for small business owners, but with a strong business model and sufficient liquidity, businesses can capitalize on the rebound and emerge stronger than ever, similar to what we saw since 2008. During these times, many small companies look to non-traditional lenders to help rebuild and grow their businesses.
What can a small business do to weather any of these effects?
- Rob Frohwein: It’s important to be realistic, manage inventory closely, and forge great relationships with your customers. Quality of operations and user experience will always win out. And don’t give up. Those that succeed are always prepared for the storm, and running opposite to the herd mentality.
- Bob Coleman: Constantly innovate. Embrace technology. Move your product or service from the “nice to have” niche to the “I have to have this” niche!
- Ryan Rossett: Establishing and maintaining a relationship with a trusted source of capital before the need arises is a prudent strategy for small businesses looking to grow. Forward-thinking, data-driven alternative lenders will spend the time to get to know prospective small business borrowers, so they can be there when those borrowers encounter a slower revenue environment.
- Ethan Senturia: Small businesses can take some concrete steps to be better prepared for a downturn, be it economic- or market-based:
- Always keep some cash reserves: Having some excess cash around to weather short-term fluctuations in demand or changes in customer behavior can help business owners ride-out slow patches without having to look for costly, emergency financing;
- Maintain a flexible cost-structure: Though some industries can do this easier than others, avoiding unnecessary fixed costs or long-term contracts can give business owners the ability to scale-up or scale-down their operation quickly in response to market changes;
- Continue to deliver great customer service: While some people may shy away from certain expenditures during periods of market uncertainty, businesses that provide superior value to their customers through excellent service will have the greatest likelihood of retaining their customers through any economic environment. A recent email from Starbucks’ CEO Howard Shultz to employees, urging baristas to be particularly considerate of their customers during the market correction, exemplifies how businesses should think first of their customers and customer service priorities during challenging periods.
There you have it, five small business experts giving their advice for dealing with market fluctuations. While the small business sector isn’t affected as quickly as the larger businesses are, they still can feel the effects of a dip in the market, especially over the long term. What affects do you think the market plays on small business?