By Ben Johnston, chief operating officer of Kapitus
Critical issues continue to challenge small businesses in the hospitality sector, from tariffs and strained supply chains to ongoing inflation, access to funding and a tight labor market.
But with the right strategies, owners can adapt and even thrive. Here are the key factors impacting the small hospitality business today—and what you can do to work around them.
1. Inflation
Small business owners face a number of challenges, including the residual effects of the inflation spike of 2021 and 2022, which resulted in increased prices for consumers; elevated cost of capital due to a higher interest rate environment; and a tight labor market for those looking to add staff.
How to Navigate It:
Be judicious in your expansion plans. In uncertain economic times, it is important to focus on goods and services that provide a demonstrated value to customers. Before launching a new product or opening a new facility, thoroughly test the market to determine demand and pricing power. Make sure that anticipated sales will more than cover anticipated expenses, and ensure you have access to sufficient capital to cover several months of operating expenses in case anticipated sales take longer than expected to materialize.
2. Tariffs
Tariffs on the import of foreign goods could eventually make manufacturing in the U.S. more cost-effective than importing goods from abroad, which could be beneficial for some industries. But in the short to medium term, these tariffs are likely to drive inflation significantly higher and cause significant disruption to the global supply chain. Higher tariffs will certainly cause prices to rise for U.S. consumers, as tariffs drive up the cost of the product being imported, and these costs must be passed on to the customer. This will not only spur inflation but will lower overall consumption, slowing the economy.
How to Navigate It:
U.S. businesses that import critical goods from abroad should determine if it is possible to source these goods domestically or to vertically integrate their supply chains to produce these goods themselves. If domestic production is economically impractical, business owners will need to pay close attention to the tariffs being levied and which countries they are impacting most. Working quickly to move production from one country to another could prove valuable should certain countries receive stiffer tariffs than other neighboring countries with similar production capabilities.
3. Access to Funding
The market for obtaining small business financing has been tight since banks scaled back their exposure in the spring of 2023 following the collapse of Silicon Valley Bank, First Republic and Signature Bank. Since that time, many customers have moved deposits out of banks toward higher yielding fixed-income products, and commercial defaults have risen substantially. In addition, interest rates are higher today than in years past, making it more challenging for businesses to afford financing.
Fortunately, businesses with strong credit profiles and a history of financing essential use equipment have quality options both with banks and non-bank lenders. However, business owners should expect a higher cost of capital than in years past and therefore should calculate the cost of the financing relative to the expected profits that the financing will generate to ensure a positive return on investment.
How to Navigate It:
For business owners who borrow money to purchase inventory, acquire equipment and fund expansion, it is important to maintain multiple financing relationships. Banks have been pulling back from lending to small businesses over the past several years, and having contacts at both bank and non-bank lending institutions can help secure the fastest and lowest-cost capital when borrowing is required.
4. Access to Labor
Despite significant tightening from the Federal Reserve, labor markets remain incredibly tight. This means that small businesses are struggling to find quality candidates at prices their business can afford. This is especially true for part-time and seasonal employees. This labor shortage will be exacerbated by the crackdown on the hiring of undocumented labor and the large-scale deportation of undocumented individuals. It is estimated that 10% of all restaurant employees, 9% of the hospitality industry and at least 25% of all agriculture employees are undocumented. A significant loss of undocumented labor could force both the cost of labor and food considerably higher, and a change in immigration policy could have an outsized impact on the industry’s ability to fulfill customer demand.
How to Navigate It:
Consider investing in new technologies and business processes that allow a business to operate with fewer employees. Installing software that can better manage inventory or can help customers self-serve can save time and may allow a business to operate longer with fewer staff. For a business’s most critical employees, consider offering additional perks such as flexible work hours, continuing education, or opportunities for career advancement. Strong relationships and the ability to satisfy employees’ career goals can help retain critical personnel in tight labor markets.
About the Author
Ben Johnston is the chief operating officer of Kapitus, one of the most experienced and trusted names in small business financing. As both a financing provider and a marketplace with an expansive network of financing partners offering a variety of products, Kapitus has connected over $7 billion in growth capital to almost 65,000 small businesses. Through Kapitus, small business owners are matched with financing tailored to individual needs, including term loans, revenue-based financing, SBA loans, equipment financing and revolving lines of credit, either directly or through its financing network.
