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The economic environment for starting a small business is significantly less hospitable than it was a year ago, according to new data from NerdWallet’s Small-Business Opportunity Index, and the increasingly unfavorable conditions have some small-business experts advising would-be entrepreneurs to prepare for rougher-than-usual starts — or even to put their business plans on hold.
The NerdWallet Small-Business Opportunity Index evaluates six types of economic data that reflect the feasibility of and common hurdles associated with starting a business: average rates on short-maturity loans borrowed for business purposes; difficulty finding qualified employees; SBA loan approvals for people of color, women, veterans and rural businesses; office rent costs; general economic conditions; and regulatory concerns among small businesses.
Overall, the NerdWallet Small-Business Opportunity Index has steadily declined from its base of 100 in September 2021 to 78.1 in September 2022, reflecting a weakening environment for starting small businesses.
Interest rates, labor issues, other factors pushing index down
According to the index’s underlying data, the proportions of SBA 7(a) loan approvals going to people of color, women and veterans have increased since September 2021. In addition, data from the National Federation of Independent Business shows lessening degrees of relative concern among small-business owners about government regulation.
But other data from the National Federation of Independent Business, Colliers International Group and the Federal Reserve Bank of New York highlight significantly higher interest rates, increasing difficulty finding qualified employees, upticks in rent costs and overall economic headwinds, all of which pushed the index down over the last 12 months.
It's indeed a challenging time for people thinking about starting small businesses, says Rob Cordasco, a Savannah, Georgia-based certified public accountant who specializes in entrepreneurs. “Setting one up is easy,” he says. “Surviving? Different story.”
Experts say: Aspiring entrepreneurs should do 5 things differently now
An increasingly inhospitable economic environment means that starting a small business now will feel a lot different than it would have six months or a year ago, according to three small-business pros. They say entrepreneurs who want to launch now need to take a different approach to some typical startup rules.
1. Be more strategic about inventory
People starting small businesses now have to put extra thought toward the timing of their inventory purchases. Prices later may be much higher than prices today. “If you purchase it now, how much will you save when inflation hits?” asks Desha Elliott, a business advisor at Accion Opportunity Fund.
Starting a new business now also means doing more than the usual amount of supply chain planning. Focus on buying inventory that’s currently available, and try to work with three or four vendors that carry a product you need so you maximize your access, says Julie Brander, a certified business mentor and district director for SCORE Alabama.
2. Keep a bigger cash cushion and prepare for different scenarios
“Absolutely have a reserve,” Brander says. The standard advice of one to three months’ worth of cash reserves is now three to six months, she notes.
Also, think through how you’re going to handle disappointing sales or a full-on recession. “What is that procedure that you have in place to help when your customer flow slows down and you need cash flow?” Elliott says. “Are there costs that maybe you can restructure? ... You want to ask before any situation happens.”
3. Invest in workplace culture sooner
Tight labor markets mean new entrepreneurs may now have to put more time and effort into creating satisfying workplaces for employees during the early stages of building their businesses, according to Elliott. “You want to keep your employees engaged and committed during the shortages. And so what are you doing to cultivate that company culture and really show that appreciation?” she says.
4. Consider pumping the brakes ...
Most people thinking about starting businesses should probably wait until conditions improve, Cordasco says. “Maybe not jump in with both feet, maybe you kind of just ease your way into it,” he says. “I wouldn't be overly optimistic.”
Entrepreneurs who do get started now may need to take extra precautions for some things to go sideways, he adds. Acquiring labor and supplies, for example, used to be a matter of having enough money; now, he says, “Those things are really hard to come by, regardless of how much money you have.”
5. ... Or not
The sidelines may be the right place for some would-be entrepreneurs right now. But for others, now could actually be a good time to start a business, Brander says. “Look around and determine what's needed in the community. Business is a solution to people's problems,” she notes.
“Even though times are volatile and expenses and interest rates are at an all-time high, there are still plenty of opportunities for regular entrepreneurs to start their businesses,” Elliott adds. Entrepreneurs who lay solid foundations now may be primed for success when conditions improve, she notes. “Entrepreneurship is a marathon and not a sprint.”
NerdWallet's Small-Business Opportunity Index combines elements of the National Federation of Independent Business’s Small Business Economic Trends data, Colliers’ U.S. Office Market Outlook, ADP’s Small Business Quarterly Research Insights, the Small Business Administration’s 7(a) and 504 summary reports, and the Federal Reserve Bank of New York’s Weekly Economic Index data.