2024 sees drop in number of small business owners, but ‘shockwave’ to come next year

This year wiped out 50,000 small and medium-sized businesses but the real “shockwave” is set to hit the economy in 2025, as owners contend with the fallout of an ongoing 15-month war, according to non-bank credit provider Ultra Finance.

Many hairdressers, tour guides, shop owners, accountants, photographers, freelancers and suppliers of all stripes are struggling to stay afloat, hurt by slower demand, cancelation of orders, scarce and more expensive financing, and insufficient government assistance during the ongoing war.

“There is a worrying anomaly that despite the challenges there is a relatively moderate decline in the net decline of small and medium-sized businesses, which suggests that the real economic fallout will come in 2025,” Ultra Finance CEO Yonatan Brand told The Times of Israel.

“In the coming year there will be many more bankruptcy proceedings and breakup of companies, which we are not seeing yet due to a delay in court proceedings and various temporary war-related measures such as the freeze of loan payments for those who were called up on reserve duty,” Brand added.

The bleak prediction is worrying said Brand as small and medium-sized companies are the backbone of the Israeli economy. There are about 600,000 active businesses in Israel of which more than 90% are small and medium-sized businesses, and more than 50% employ one worker, mostly the owner, according to Ultra Finance data. The firm provides tailored funding solutions to thousands of small and medium-sized enterprises.

According to Ultra Finance, 2024 will mark the second consecutive year that the number of small and medium-sized businesses in the Israeli economy dropped after years of growth. This year, 50,000 Israeli businesses had to be closed and 46,000 new businesses opened – a net decline of 4,000 businesses.

Ultra Finance CEO Yonatan Brand. (Courtesy)

In 2023, there was a sharper net decline of 19,000 businesses, as 49,700 were opened compared to 68,700 that were closed, with many hurt by increased interest rates, inflation and months of political turmoil over a proposed judicial overhaul.

Since the outbreak of war following the brutal October 7, 2023 onslaught by the Hamas terror group, many smaller businesses have ceased operations, as their owners — often sole employees — were called up for reserve duty, grieved loved ones, or were displaced from their homes.

“The damage of reserve duty to small and medium-sized businesses is cardinal,” said Brand. “Even as 50 percent of employees of a larger business were called up for military duty at the height of the war, that still left the other 50% at work, while the absence of 50% of employees of a small business with a one or two employees means that there is no business.”

In addition, war-related delays in construction starts and other project work across sectors of the economy have led to a stoppage of payments to suppliers, which are mostly small and medium-sized companies, said Brand.

The rate of bankruptcies among small and medium-sized businesses increased by 15% in 2024 compared to 2023, according to data by Ultra Finance. There is also a continued rise in the voluntary liquidation of businesses in recent years from 1,200 in 2020 to 1,500 in 2023, the data showed.

Brand lamented that, although small and medium-sized companies contribute about 55% to national output — surpassing the high-tech sector — they have access to only 24% of business credit in the economy and are often forced to rely on relatively expensive bank financing.

“2024 showed an 8% increase in credit for small and medium-sized businesses, but this figure hides a harsh reality,” said Brand. “While large businesses enjoy favorable financing terms and low interest rates of 3%-4%, small businesses pay higher average interest rates of 6%-8% and are required to provide strict guarantees.”

Jerusalem’s Mahane Yehuda market stands largely empty, on August 4, 2024. (Chaim Goldberg/Flash90)

Brand attributed the situation to the dominance of the country’s five largest banks and a lack of competition in the absence of a variety of alternative non-banking credit sources.

“The situation can’t continue where there are five big banks and because of the war they don’t provide enough credit to small and medium-sized businesses and there are no sufficient alternative solutions,” said Brand. “The government needs to lower regulatory barriers as much as possible and encourage banks to support small businesses, as well as develop alternative credit solutions.”