What does a volatile stock market mean for small businesses?
“ASX to plunge” screamed one headline this morning. “Regulators rush to calm fears” screamed another.
The stock market is a crucial aspect of any economy, including Australia’s of course. Volatility in the stock market can have a significant impact on businesses of all sizes, including small businesses.
But where does the rubber hit the road for small businesses when it comes to stock market volatility?
Harder to Raise Capital
Firstly, small businesses on a trajectory for listing (IPO) or for acquisition by a listed entity can find these plans interrupted when capital becomes harder to raise. In times of high volatility, investors tend to become more cautious and hurdle rates* for acquisitions and IPOs increase. An unwanted setback for small business owners planning retirement by selling their business this way!
Cost of Capital
Secondly, on the subject of ‘hurdle rates’ market volatility can also impact small businesses’ cost of capital. When the stock market experiences high volatility, lenders and investors demand higher returns to compensate for the increased risk, potentially feeding into already higher interest rates. Higher interest rates, make it more expensive for small businesses to borrow money, impacting their profitability and ability to raise capital.
Thirdly, stock market volatility can impact consumer confidence, leading to decreased consumer spending. This can be particularly impactful on small businesses reliant heavily on local or regional economies. When consumers become hesitant to spend money, small businesses can find themselves chasing falling sales at falling margins.
Finally, stock market volatility can impact small businesses’ confidence and overall economic outlook. Small business owners who perceive the stock market as volatile may become more cautious and less likely to take risks. This can reduce their willingness to invest in their business, hire new employees, or expand their operations.
Small business owners should be aware of the potential impacts of stock market volatility and take steps to mitigate its effects, such as diversifying their sources of funding, managing their cash flow carefully, and seeking expert advice.
And of course, it helps for a small business to have a financier in its corner who knows their business, knows them personally, and who they can pick up the phone to any time for support when they need it!
* A hurdle rate refers to the minimum rate of return that an investor or a company requires before they are willing to invest in a project or undertake a particular investment opportunity.