How Will Market Volatility Affect Small Businesses?





August has been a roller coaster for Wall Street and the rest of the world markets. It will be a while before we again approach the Dow Jones Industrial Average high of 14,000 in July 2007, but we are also a long way from March 2009 when the Dow closed at less than half of that figure. The question on everyone’s mind is whether the stock market plunge will trigger a recession, or whether recent developments will lead to a turnaround as gas and commodities prices go down.

Small businesses have borne the brunt of the down market in the past three years. While it is hard to predict what will happen in the market over the next month, there have been some clear trends.

bags of money

For tech startups, raising equity capital in the form of angel and venture capital will become more difficult compared to just a few months back. If market volatility continues, the valuations of startups will start coming back to more reasonable levels. Thus, startups with solid business models could actually benefit. It depends on the type of industry sector you are in and what kind of growth and access to credit you are looking for.

Main Street businesses have been the hardest hit during the recession, as their growth stalled and their access to credit subsided. The stock market’s volatility has ignited fears of another recession, which means gas and other commodities will remain subdued over a period of time. In fact, over the short to medium term, the increased uncertainty in the markets will be beneficial for small businesses. Their input costs will go down, while growth will be tepid. In the past few months, the stock markets had run ahead of themselves — too much money in the economy increased prices without pushing up the growth rate.

Small business owners should be more worried about how the U.S. government tackles this current slowdown than about stock market swings. A sharp decrease in federal spending could lead to a large and sudden contraction in the economy. For instance, if the Pentagon budget is cut, it means that military bases could close. The small businesses around those bases – grocery stores, bars, restaurants and other businesses – would suffer immediately.

If contracts with weapons manufacturers are canceled, those companies may be forced into layoffs. This would hurt suppliers of the manufacturers as well as surrounding businesses around those companies. In both of these cases, the reduction in government spending will hurt small businesses much more than increased stock market volatility does.

So while commodity prices decline, disposable income – and the willingness to spend it – may decrease. Small business owners must be sure to adeptly manage their cash flow and keep a close eye on their marginal costs. These are tips for success not only during difficult economic times, but any time.

3 Comments ▼

Rohit Arora Rohit Arora, CEO and Co-founder of Biz2Credit, is one of the country's leading experts in small business finance. Since its founding in 2007, Biz2Credit has arranged $800M in small business loans and has helped thousands of entrepreneurs. Rohit was named Crain's NY Business "Entrepreneur of the Year 2011."

3 Reactions
  1. I don’t think there’s any solution to get the economy back on track without hurting small businesses. The question is which plan will hurt less while achieving the desired result? Everyone knows that you can’t spend beyond your means forever, yet we don’t put people in office that have the same mentality. We have no one to blame but ourselves, no matter which side of the political spectrum you’re on.

  2. The government has to cut back somewhere and Lionel is right, it’s going to hurt someone. The key is to ensure that the pain is minimized and the ultimate goal of a healthier economy is achieved (including a government that doesn’t spend more than it makes, and maybe even saves a bit for a rainy day like every one else).

  3. Just like in the UK, the government really does need to cut back, but also put in place incentives to support new and small businesses, after all they are in the majority.

    But small businesses have to also stop blaming the current economic situation for everything and see if there is anything they can do. Often when there is something like this, it becomes an excuse to shift blame from our own doorstep when we have taken our own eye off the ball.

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