(Jackie Benson of Wells Fargo and Rich Bradshaw of United Community. Photo by Amy Randall Photography)

Small businesses continually face challenges, whether it’s due to individual factors or the larger economic climate.

Integrated Media Publishing hosted a roundtable discussion with two leaders in the world of business on Oct. 21, 2024. The topics ranged from working capital to interest rates.

Here are excerpts from that conversation, edited for brevity and clarity.

The participants were:

Jackie Benson, economist with Wells Fargo

Rich Bradshaw, president and chief banking officer, United Community

Integrated Media Publishing Editor David Dykes moderated the discussion.

Question: Jackie, let me start with you. In the last report that I read on small business optimism from October, optimism ticked up, but you raised some questions about economic uncertainty, and that might dent the small business outlook. Can you talk a little bit more about that? And you mentioned specifically sales, capital investments, and inventory investment weakening in September.

Jackie Benson: Every month, the National Federation of Independent Businesses releases a survey, basically asking small business owners about their current expectations for the economy, how business has been, how hiring has been, about price changes, things of that sort. So that survey you're referencing, in that release, the uncertainty index, which captures the amount of businesses answering, “I don't know” or “I'm uncertain” to these questions they're asked. So that reaches an all-time high for that survey's history, and that goes back to the late '80s. Obviously, small businesses are dealing with an uncertain economic climate, but then also the political climate with the elections coming up in November. Generally speaking, what we see in that survey is even when there's monthly changes in optimism, overall, attitudes are pretty poor. We've seen price levels increase quite substantially. Consumers are still spending, but that survey also deals with manufacturers and people in the construction space, those interest rate-sensitive sectors that have been disproportionately burdened by the Fed raising interest rates at the fastest pace in 40 years. So, what we're seeing is that as these real data on GDP, even though that's objectively strong, if you ask an economist, if you were to ask a small business owner, things aren't quite as bright.

Q. Rich, let me ask you this. Most small businesses don't make it past their third year. The successful ones have figured out a winning formula. From your experience in dealing with these small businesses, what do you think are the keys to a winning formula?

Rich Bradshaw: Well, first, to be clear, the bank focuses on small businesses. This is our life bread, and I've been doing small business, including SBA, for almost my entire banking career. So, there's not one answer, there's several. I think one of the big things is when they build in their projections, they don't often build in enough margin. You need to have a little margin in there because things don't always go right. And so that's a big part of it. I think they need to explore things like the SBA program, the United States Small Business Administration, both from a lending standpoint, because it's going to be hard to get a loan from a bank with no history. Startup is going to be very difficult. And so, the SBA will provide a guarantee to the bank, so that will entice the bank to make the loan. But the SBA also has retired executives that will provide a consulting service to that borrower as well, and they'll do that for free. And so that's an opportunity. And then one of the things I personally like to advise, and we always want to be the trusted financial advisers, they should think about setting up an advisory board.

And it's not a paid board. You take them out to dinner once a quarter or something, but you have your banker, your CPA, and maybe an attorney on the board. And that’s so they're able to bounce ideas through and get a different perspective because everyone's seat at the table and your lenses are different. And so, I think the ones that have set up these advisory boards are really a step ahead of the competition.

Q. Jackie, do you think that from your economic analysis, are there certain keys that are more important than others for a small business in addition to what Rich said?

Benson: I think that all small businesses have faced similar challenges over the past few years. I mentioned the fact that the Fed has raised interest rates. In the September NFIB survey, I believe the average interest rate on a short-term loan for a small business owner was above 10 percent, and that was the highest in some time. Now, of course, the Fed has started cutting rates. They started off this easing cycle with a bang in September. Markets generally expected them to cut rates by 25 basis points. They went 50. We expect the Fed to continue cutting through the end of next year, which would bring the federal funds rate down from its peak of 5½ percent where it was all the way down to 3.25 percent. So that should provide some relief for small business owners, but certain challenges aren't going away.

Like I said, prices have increased quite substantially. We don't expect price declines, just inflation softening. Which means that prices will increase at a softer rate moving forward. Small businesses, their job openings hit more than a three-year low. We expect labor demand and the labor market will continue to downshift a bit moving forward. That said, our outlook is pretty bright mid next year and onward when growth is expected to resume at a solid pace, and the labor market should regain some strength as well.

Q. The Wall Street Journal noted recently there was a time when the main streets in small towns were the lifeblood of small businesses. The hardware store, the candy counter, the dress shop, this was where locals gathered and where entrepreneurs thrived. But the Journal said that hasn't been the story for a long time. Across the country, many small towns have been reeling as local industries close and people move to find jobs. The Journal said main streets have lost out to the convenience of online shopping, as well as nearby malls, where chains and big box stores offer lower prices and greater variety of goods. Meanwhile, the Journal said credit can be hard to obtain for entrepreneurs, and inflation has driven up cost. So how can entrepreneurs beat those odds? Rich?

Bradshaw: That's a great question, and I don't think Covid helped any of this, but I still think we very much support Main Street. I think the small businesses are still the backbone, but they're going to have to work harder. I mean, there's no doubt about it. … It's the same question between the big banks and the community banks. It's the same formula, and how we're trying to do it is on service. They have more technology than we do, but we know (a customer’s) name when they come in. I think that's really the key. They call, we call back. We still meet in in person with our customers. That's really where we're trying to make the difference.

And also, small things like, if you have the head count, are you able to make some deliveries? The person couldn't get in to pick up their thing and they've got a wedding coming up, can we take it to them? It's doing the little things extra, doing what your customers will make you choose their business. We really want to do and make a difference and differentiate ourselves. I think it's the same thing for small businesses. They've got to go the extra mile right now because it is a world of Amazon. Push the button and it's here. And to beat that, the only way we can really compete against that is service.

Q. Micro-, small-, and medium-sized enterprises are the bedrock of the U.S. economy. They employ nearly six in 10 workers, produce 40 percent of the value-added nationally, and grow into meaningful share of very large corporations, but the so-called MSMEs are only half as productive as large capital. Is what's needed here, Jackie, working capital?

Benson: I think you highlighted some important statistics about the contributions that small businesses make to the overall economy. But yeah, there could be some differences in productivity. I don't know if I can opine on what's needed necessarily. I mean, productivity is something that we've seen increase recently. It's been a driving force alongside the adoption of artificial intelligence and productivity-enhancing software. These industry changes are an unstoppable force, in my opinion. If you just look around at the number of firms adopting these tools, it's quite remarkable, and it's come on quite quickly. So, I'm not sure if I have any specific advice for how small businesses can compete in that environment other than to say, this is the way the industry is going, and it's going to create substantial opportunities for the economy at the cost of maybe some of the less productive firms. And if it were me, I would try to find a way to adapt and make use of those tools as well.

Q. Let me follow up by saying, working capital for a small business, a startup, it's always going to be a challenge. Is it more so now than it used to be?

Benson: Can you define working capital?

Q. Money to get started, money to initially fund payroll, to get the supplies and work the supply chain and get the resources you need, hire people, pay their salaries. I don't know if that's a technical definition of working capital.

Benson: The cost of capital is something that has become prohibitive for some small businesses, certainly. And this is as the Fed has fought inflation over the past couple of years. Economy-wide interest rates have increased to levels that squeeze smaller firms more substantially than they squeeze the larger firms with bigger resources to begin with. We do expect the cost of capital will decline over the next year or so, which should spark some hope for those smaller firms that are currently struggling. Labor availability is another challenge. However, the unemployment rate has increased over the past year. We're still pretty historically low for the U.S., but that rise in unemployment has been driven by increases in the size of the labor force. Folks either losing their job, but more commonly coming off the sidelines, deciding to join the labor force, perhaps because they need to, because costs are so high. But nevertheless, that increased supply of workers is another advantage for small businesses, trying to find tools for the job.

Q. Rich, working capital, what's your assessment of the situation now and what lies ahead?

Bradshaw: Well, certainly it depends on the small business and the situation, but oftentimes it is working capital, and I think that takes place in two different buckets. And one is with lines of credit. So, you provide them lines of credit or you can provide them permanent working capital in the place of a term loan. This gets back to, depending on the size of the company, they can do that through their bank, particularly if they're small or startup, through their bank, through the SBA program. Again, where you get that government guarantee, which is going to make the bank more likely to make the loan, because if they're a smaller new company and they don't have a lot of net worth, it's going to be a challenge to get that loan. And so, utilizing the government guarantee products is the way they can do that. And they're going to have to work closely with the banker and make that happen.

Q. One of the things we hear in interviewing very small businesses, asking what one thing would they do differently, they always say, we wish we had had more startup capital. So, what's the biggest mistake, Rich, that you think small businesses make when they're trying to get started or get their feet underneath them?

Bradshaw: I think this goes back a little bit to what I said in the beginning of our interview in that margin, in that you got to create more margin. You got to have more working capital. You got to have more equity coming in. Equity makes a really big difference. You got to create a little bit more cushion.

Q. You mentioned AI. What's its looming effect on small businesses?

Benson: It's all speculation at this point, but just as any significant disruptor has affected the U.S. economy, you can think back to the Industrial Revolution or what have you. It comes at widespread benefits and concentrated costs. So, with AI, we would expect the labor impact to be most acutely felt in office-using employment, as productive tools, like I mentioned, replace some current existing office jobs. But then it will create the need for jobs elsewhere in the economy, maybe that we can't even foresee right now. So, it's a very hard thing to measure empirically, and that's what I do. I try to quantify things. So, when I don't have a clear answer, it's quite frustrating. For small businesses, I'd say the biggest challenge from where I sit is maybe that lack of capital to be able to bring on board the AI tools that some of the larger businesses are doing at the same time. So that discrepancy and resources could prove a challenge. But like I said, if small businesses do find the means to adopt these tools, it will be just as productivity enhancing for them as it is for everyone else.

Q. Rich, does AI come up in your conversations with small businesses?

Bradshaw: AI has definitely come up, and it's the place that we see it most and the place we see in our industry where we're fighting it most is fraud. So, fraud is something we're talking about every day, and AI plays a role in that. We have a dedicated fraud team working daily. We have a Tiger team that meets monthly. The bad guys are smart, and they're always coming up with something new. And so, we're always looking how we get better for this. We have several different tools in place that we use. We use a product called Positive Pay and Verafin. This has artificial intelligence associated with it to identify cases that eventually go to an officer in the bank to make a decision and analyze it, but it points out where the risks are. It goes, you need to look at this account. Something may be wrong with that account. One of the biggest areas that we see right now is online account takeover. So, they're not coming into the bank. They're not getting into the bank systems, but they're getting into the customer's email, and they're sending us emails that you should wire this money to this account, and it looks like it's from their email.

So, there's just a lot of different things out there, and probably the biggest place, as I said, is on the fraud side. And that's where we're spending all our time and money. And the things like our two biggest programs, one doesn't cost a thing, one costs a little something. And I say a little, it's not much, but it costs nothing compared to your losses. And so, we just really encourage all our treasury management customers to utilize our resources for that.

Q. When you talk about these small businesses, do you express a need for cyber security insurance, privacy measures they need to take? Do you get that deep in the well when you talk to these startups?

Bradshaw: We do have a lot of conversations. We've also done two Webex's for them, where we invite customers, and it's on our website. We've gone in and talked about this, and we're just scheduling our third right now. So, we're talking about fraud all the time, and unfortunately, so are the bad guys.

Q. Protection is an expensive proposition for small businesses, and we’re a small business so we know a little about that. New approaches to identity standards, are those needed to combat the risk for small businesses, or is there a road map they can follow?

Bradshaw: I sit on the senior team, so we're certainly discussing this. I will say the same thing as my partner here. Mark Terry, our chief technology officer, has a whole team dedicated to this space, but this is not my area of expertise. But I can tell you that all banks have a lot of money and time and interest in this area right now, because if we're not doing it, someone has the opportunity to shut down the bank, and that's not acceptable. So, we spend a fair amount of time, money in this effort.

Q. Talk about underwriting for small business loans. Is it tightened? Is it loosened? Is it about the same as it's always been?

Bradshaw: That's a great question. I would say it has loosened a little bit since Silicon Valley (Bank collapsed in 2023). I would say everything got a little tighter. Then we were all trying to figure out what was what, and it was a new world. But I'd say it has loosened up a little bit. ... There's always a healthy tension between credit and the sales side, but we're really working very hard to put those two together and particularly lean in on our existing customers. If we have existing customers that have exhibited the right history with us, we need to be leaning in on them and probably go the extra mile. And so that's where we're spending our time and effort.

Q. Jackie, are you noticing any trends there?

Benson: The Federal Reserve tracks this. They survey banks and ask about their lending standards. And although it technically shows banks still tamping down on lending standards, that share has dropped significantly, especially relative to the peak after recent bank failures. So, it does seem that conditions are loosening somewhat for lending to both small and medium-large firms of all types. The one exception is commercial real estate, which is a whole different beast, and banks are still very risk-averse there.

Bradshaw: I'd also comment that we're seeing in our own pipelines that activity has picked up. I don't want to say that it's picked up from zero to 15 percent, but it's certainly picked up from zero to three, four, five percent increases. So, the pipelines are definitely picking up.

Owner confidences definitely have picked up. And then on top of all this, we have an election in just a couple of weeks. And I think we get past that, I think it's going to feel better, too.

Q. Not talking about politics, but can you give me your best economic forecast for South Carolina going forward?

Benson: I can tackle that. South Carolina has several tailwinds working in its favor. One is population growth. … Redfin published top 10 cities where people are searching, looking to move. Myrtle Beach was No. 2 out of every city in the country. … It was very recent. And similarly, South Carolina ranks among the top-ranked states in terms of population growth pretty consistently, certainly in 2023. Another benefit is actually an upshift in technology jobs. So, if you look at the composition of job growth in South Carolina, a fairly significant portion of that has been in the information sector and also in professional and technical services. This reflects technology employment, which is generally higher paid. The biggest correlation, the biggest factor though, is that population growth I talked about, which will underpin economic growth moving forward.

Q. Rich, what does the bank foresee?

Bradshaw: The good news is we're in six states, and I feel really good about the six states we're in, but particularly South Carolina. As Jackie just said, there's population growth, but I think we're really pro-business, and I think that has a great appeal. So, we see businesses moving in. We also have, for a not-large state, we have a fair amount of international companies. So just here in the Upstate, we have BMW, Michelin, you have Volvo in Charleston. And I think we're just going to see that continue. And I think we ought to give kudos to our governor, our mayors. They've done a great job recruiting businesses to the great state of South Carolina.

Q. You mentioned tailwinds. What about headwinds?

Benson: I think the economy isn't out of the woods if we look nationally. Historically speaking, the Fed has never raised interest rates to this magnitude and not triggered a recession. So, the fact that we're growing above three percent as a national economy is, quite frankly, a miracle. When we see interest rates rise, there tends to be a lag before economic deterioration happens. And that lag seems to have extended in the post-pandemic world due to a variety of factors. But it doesn't mean that we're out of the woods. It could just be longer. That's not our base case. Although we expect recession risks, or we perceive recession risks to be elevated, we are in camp soft landing. So just to level-set, we're not expecting a recession, but that risk is still there.

Q. And South Carolina headwinds, specifically?

Benson: You have the Port of Charleston. Trade is very important to the state. If we enter 2025 and there's President Trump in office, he has promised substantial tariffs that could discourage exports if met with retaliatory tariffs from our trading partners. So, I'd say South Carolina being as important to trade as it is, that could disproportionately harm the state if enacted.

Q. Rich? Any clearly identifiable headwinds?

Bradshaw: I totally agree in terms of, it looks like a soft landing, but there's certain pockets that we're seeing, the transportation side, trucking, that's a little soft. And as long as it's a soft landing, we'll be fine. If it’s harder, there are definitely going to be headwinds. It doesn't appear that's the case. And then off on the side, we've got Ukraine and we've got the Middle East, and those are variables that could change tomorrow, particularly in the Middle East. So, we need to be watching that and thinking about that. And that could certainly dampen things a little bit. But I generally feel pretty good about the economy in the Southeast, and particularly South Carolina.

Q. And finally, let me ask each of you, what do you think is going to be the biggest sector growth in South Carolina in the next year, three to five years? You mentioned the port. Obviously, trade is so important. The number of corporations that have come in to South Carolina. But one of the things we don't have are a lot of corporate headquarters. I mean, the bank is headquartered in Greenville, but over the years, Greenville and South Carolina have lost a lot of corporate headquarters. Is that a concern? Jackie?

Benson: I'd say it may be depending on where you sit. It isn't for me necessarily. I look at variables like personal income and job growth, things that underpin standard of living for South Carolina residents. And all of those point to solid growth, right? And like I mentioned, tech employment is really taking off here. And with that comes productivity gains. And with productivity gains, they produce greater income gains. So, although you may not be on the same playing field as Florida when it comes to attracting new headquarters, I think that the economic fundamentals here are solid.

Q. Rich, the bank moved its headquarters to Greenville some time ago. Bank headquarters are so important. But when you look at South Carolina, does the bank wish or do you hope that there'll be more headquarters? How do you see that corporate environment?

Bradshaw: That's an interesting question. So, I see this being attractive, particularly for maybe more international companies, because we've already got the foothold of BMW and Michelin here, and that's got to be attractive. And I said the pro-business aspects of South Carolina play much bigger than you think. I grew up in the state of California, and that tends to be pro-consumer, and so you have many small businesses and large businesses leaving. So, you get to see both sides. I did want to hit on the one area you talked about in terms of industry. I think because over the last 40 years, we saw so much manufacturing move offshore. You're starting to see that come back. And because of the industries that we have here, particularly in auto-related, starting to see some aerospace. We've got Boeing down in Charleston. I think manufacturing is an area that will continue to move back, and I think South Carolina is going to benefit in a very large way for that. And we are big fans of manufacturing and like to play in that space from a lending perspective.

Q. Finally, let me ask you just to summarize small business. As we've talked about, so important, the backbone of South Carolina's economy. The economic forecast is not bad. Where do you think South and small business will be in five years?

Benson: Generally speaking, I think South Carolina is set up pretty well for success when it comes to business formation of all types, including small business. There are several factors, reasons why a South Carolina is an attractive place for not only investment, but people as well. And as more people are drawn to the state, that is creating greater pool of workers. And that's in turn drawing companies. So maybe not headquarters, but Rich mentioned the auto space. As electric vehicle manufacturing is taking off and drawing all of this investment, we're seeing a parade of EV suppliers open up shop in South Carolina. And I do think that's a bit of a longer term tailwind for the state to support the manufacturing sector. And just as growth accelerates, I do think that's going to be an attractive place to be for small businesses as well.

Q. Rich, politics aside, the next five years?

Bradshaw: I think the next five years are going to be good. I really do feel that way. And as Jackie said, more people move to South Carolina, we have more customers. We have more people to start small businesses. I really think that has a lot of opportunity. We play in the space, and I am particularly a big fan of franchises, and we happen to have a fair amount in South Carolina that are headquartered here or very active here between North Carolina and South Carolina, and I just see that continuing to grow as well. So, I'm excited about the next five years. I think we're in the right place, and providing everything stays where it is or better in Europe and the Middle East, I think we're just going to be fine.

Q. I want to thank each of you for your time this morning. I appreciate it.