Inflation May Force 2 in 3 Small Businesses to Close in 2022 📉

July 9, 2022

After two years of pandemic-related shutdowns, labor shortages, and supply-chain issues, small business owners have another headache to deal with – inflation.

In May 2022, the U.S. inflation rate hit 8.6%, its highest level in 40 years. To find out how this is affecting small businesses, in June, Digital.com surveyed 1,000 owners and co-owners of small businesses with 500 or fewer employees. The results show that inflation – and rumblings of a recession – present a serious threat to the survival of the majority of small businesses.

Key Findings

• 65% of small businesses say it’s ‘very likely’ or ‘likely’ they’ll permanently close if inflation continues at its current rate.

• The prospect of a recession has 95% of small business owners ‘very’ or ‘somewhat’ concerned

• Businesses that are in danger of closing are more likely to have already been impacted by declines in revenue and customers, pandemic-related shutdowns, and supply-chain issues

• 38% of small businesses facing closure plan to lay off employees to stay afloat

Inflation, possible recession have majority of small business owners ‘very concerned’

If inflation continues at its current rate, 32% of respondents say it’s ‘very likely’ they’ll have to permanently close their small businesses; 33% say closure is ‘likely.’ This represents a potential loss of 65% of small businesses in the U.S.

Eighteen percent of small business owners say closure is ‘unlikely,’ and 11% say it’s ‘very unlikely.’ The remaining 6% are unsure about what impact continued high inflation will have on their business.

According to small business expert and marketing consultant Dennis Consorte, it’s “no surprise” that so many small businesses are in a vulnerable position.

“Small businesses have struggled to survive two years of COVID lockdowns,” Consorte says. “Many of those that made it through are likely to be low on the resources and energy required to now survive the highest levels of inflation in 40 years.”

The ongoing economic impact of inflation has led to the threat of a recession.

Small business owners are taking note of this as well, with 60% of all small business owners saying they’re ‘very concerned’ about a possible recession in 2022. Thirty-five percent are ‘somewhat concerned.’ Only 5% of small business owners say they’re ‘not at all concerned’ about a recession.

Owners of businesses that are already in precarious positions are in a heightened state of anxiety about the possible recession. Seventy-one percent of businesses that are in danger of closing are ‘very concerned’ about a recession, compared to 37% of businesses that are unlikely to close.

However, these business owners are aware of the threat a recession poses, with 53% saying they’re ‘somewhat concerned’ about a recession.

62% of businesses started during the pandemic in danger of closing

The pandemic was a boom time for entrepreneurs starting new businesses, with Americans filing record numbers of new business applications in both 2020 and 2021.

However, inflation might be about to make that boom go bust. Sixty-two percent of businesses founded since 2020 will ‘likely’ or ‘very likely’ close down without relief from inflation.

Businesses founded just before the pandemic, between 2017 and 2019, are even more likely to be struggling. Seventy-three percent of these businesses say closure is likely.

Even the majority of well-established businesses are being threatened by inflation. Fifty-seven percent of businesses founded between 2007 and 2011, and 55% of businesses founded before 2007 say permanent closure is ‘likely’ or ‘very likely’ if inflation doesn’t ease up.

Part of the challenge of keeping a business viable is building a customer base, which was especially difficult during the pandemic, according to Consorte.

“Established businesses have a base of loyal customers that can keep them afloat during difficult times,” he says. “By contrast, a new business must invest in building a following. Loyalty happens when people make a habit out of buying a product or service. But for newer businesses, these routines were first disrupted because many small businesses were deemed ‘non-essential’ during the early part of the pandemic. Now they’re disrupted because inflation makes people rethink their purchasing decisions.”

Advertising, finance, construction businesses are in the most danger

The industries facing the biggest potential losses include advertising and marketing (80%), business and finance (76%), construction and manufacturing (72%), education (69%), and food and hospitality (69%).

Regarding the challenges facing advertising and marketing in particular, Consorte says, “Many businesses respond to economic downturns by cutting unnecessary costs. They may perceive marketing and advertising as unnecessary when the goal is survival rather than expansion.”

Meanwhile, only 49% of businesses in both the personal care and services and retail industries say they’re likely to close.

Half of businesses likely to close suffering from decline in customers, shutdowns

Regardless of their viability, businesses report that inflation is largely hitting them in similar ways.

Shipping and transportation costs have increased for 48% of businesses in danger of closing and for 50% of businesses unlikely to close. Thirty-four percent of likely-to-close businesses have had to increase payroll to keep pace with inflation, as have 32% of businesses that aren’t likely to close.

The biggest indicator of whether a small business can weather inflation appears to be how it’s already been affected by the other economic issues of the last two years.

Businesses that are ‘very likely’ or ‘likely’ to close this year are more likely than those that aren’t to report being impacted by pandemic-related shutdowns (50% vs. 29%), a decline in customers (50% vs. 42%), declining revenue (46% vs. 36%), and supply chain issues (44% vs. 38%).

Businesses turning to raising prices, cutting salaries, and layoffs to avoid closure

Since May 2021, 97% of all small businesses surveyed have taken some kind of action to combat inflation and other pandemic-related issues.

Forty percent of business owners took a pay cut in the past year to keep their business running, while 31% cut employees’ salaries. Other tactics small business owners have already tried to ease the pain of inflation include raising prices for customers (37%), staff layoffs (32%), and changing products or services offered to cut costs (30%).

If inflation continues unabated, more changes are on the way for small businesses trying to keep the doors open.

Thirty-eight percent of businesses that are in danger of closing plan to lay off employees. Thirty-seven percent of business owners will cut their own salaries, while 35% will trim employees’ salaries. Thirty-six percent plan to pass on inflation costs to customers by raising prices. Thirty-four percent will declare bankruptcy and restructure their business to stay open.

However, Consorte cautions that while these solutions might be necessary in the short-term, they can have negative long-term side effects.

“During inflation, a company may try to stay afloat by cutting costs and increasing prices,” he says. “Problems arise when the quality of their products or services suffer as a result. This can drive revenues down, as people look elsewhere for better products.”

Instead, he advises companies to take “a more holistic approach. Give people a reason to spend their money with you rather than your competitors. If people believe in your brand, and feel like they’re part of something bigger than themselves, they’re more likely to spend their money with you.

And, they’ll be there for you when the economy gets better so you don’t have to start from scratch.”

Methodology

All data found within this report derives from a survey commissioned by Digital.com and conducted online by survey platform Pollfish. In total, 1,000 Americans who own or co-own a business with 500 or fewer employees were surveyed. Appropriate respondents were found via Pollfish’s screening tools. This survey was conducted on June 17, 2022. All respondents were asked to answer all questions truthfully and to the best of their abilities. For full survey data, please email Content Marketing Manager Kristen Scatton at kristen@digital.com.

SOURCE: Digital.com