Small Businesses

Contribution

Small businesses are generally defined by the U.S. Small Business Association (SBA) as independent businesses having fewer than 500 employees. Based on SBA's definition, there are  33.2 million small businesses in America, which account for 99.9% of all U.S. firms.

• Small businesses are credited with just under two-thirds (63%) of the new jobs created from 1995 to 2021 or 17.3 million new jobs.
• Small businesses represent 97.3% of all exporters and 32.6% of known export value ($413.3 billion).
• They also employ almost half (46%) of America's private sector workforce and represent 43.5% of gross domestic product.

Assessments

Magaly

Currently small businesses despite the evident drop in sales and earnings for most, still seem optimistic about their financial health, and they seem to be focused still on finding the correct talent, as job openings continue to be very high compared to history. However, positive expectations of future revenue and growth seem to be more sentiment base, and the current stable conditions could be having a biased impact on their sentiment, so I don't think we can take it as a reliable indicator of future conditions.

Analysis of the 2008 recession indicates that small businesses were hurt mostly by falling demand more than by credit tightened, however concern with sales started until late in 2008, after conditions deteriorated significantly. So is difficult in my opinion to forecast that while sales have been stable currently, they will remain this way later on, as it seems more of a lagging data.

Small businesses were also the ones that has the largest declines in employment in 2008 among all firms, and their recovery was also significantly slower than largest firms, with reported recovery in some factors being sluggish even after 2010.

Bankruptcies are starting to increase at a faster pace this year (from a very low level, and I dont expect to see 2008 levels, but we could see a similar rate of increase), and current funding conditions don't signal yet the best environment for unprofitable businesses to thrive, which unfortunately is more than 50% of small businesses.

But there are still a lot of questions about the debt structure of small businesses, their creditworthiness, and their dependence on it, and data about it seems to be limited or nonexistent. This in my opinion is key to having a better understanding about the hit the small business could take in a sudden credit contraction and even the impact of higher rates for longer. Due to other cycles, I have the intuition the bigger hit from credit contraction could be more indirect, as demand falls throughout the economy.

Taking all into account, I find it difficult to find the growth factors that could support a small businesses recovery in the near future, other than a broad economic recovery or liquidity coming to the economy, these are the potential headwinds I currently see:

• Falling demand due to a recession, or a credit contraction
• Falling inflation, but sticky wage growth (labor market continues to be tight) could squeeze even more their profits
• Majority of their financing comes from regional banks
• Their current decrease in investments if prolongue could be detrimental for their competitiveness and growth long term. Especially as larger firms report better funding conditions than smaller ones.
• Fiscal support has now rolled off completely
• Higher rates could make it impossible to refinance their debt or take new one for investments or expenses.
• Past cycle indicating small businesses have a slower recovery and bigger hit on employment in a recession.

Key Insights

• Even though small businesses have struggled the most, the majority still see their businesses in a good financial position, but the optimism about the economy is very low still.
• Employment measures by ADP, have only declined in the very small businesses (1-19 employees), but still less than 1% y/y drop. Job growth is declining for most business sizes.
• CFO survey reports that from Q1 to Q2 expected 2023 revenue fell from 7.2% to 2.3%, but expected employment growth increased from 2.2% to 6.1%
• Inflation is still considered the biggest concern among small businesses. If inflation does not ease, small businesses could continue to struggle especially as pricing power is diminishing.
• Until now price increases have come down almost to levels seen on average.
• Job openings is still high, and firms seems to still have the disare to hire more workers, however hiring plan have started to cool.
• Due to the uncertainty, higher rates, and financing conditions small businesses are pausing plans for expansion or larger spending.
• Much like in 2008, small businesses seem to be in a more difficult position than larger firms.
• Tightened standards have increased considerably for small firms, but falling demand for loans is what seems to be more prominent. This is also a similar pattern that in the 2008 crisis, and in line with companies not planning to expand.
• Credit conditions are still not a big problem for most businesses, however rates paid are te highest since June 2007.

Others

USB

Bankrupcies rising shows weakness in the sector, and it is experec to continue due to 3 Reasons:

• They got a lot of fiscal support during the pandemic , and now that have rolled off completely
• Very sensitive to rising interest rates, they have a very large proportion of floating rate debt
• They have less funding options

NFIB

"Small business owners remain very pessimistic about future business conditions and their sales prospects. But in some industries, such as construction, health care, transportation and some consumer services, spending and therefore labor demand remains strong. But overall, the number of firms reporting employment gains has been falling gradually. Capital spending and inventory investment are down. Overall, economic growth is falling. This will help put a damper on inflation, but at the cost of lower employment."

U.S. Chamber of Commerce

• “The challenges of our current economy may have delayed some small business owners’ plans to expand or hire more staff, but now they see opportunity for growth on the horizon,” said Tom Sullivan, Vice President of Small Business Policy at the U.S. Chamber of Commerce. "Small businesses are again showing remarkable resiliency. There has been a strong majority reporting that their business is in good health over the last year and it’s clear many have high expectations for the future.”
• “The percentages of small business owners expecting an increase in revenues and hiring this quarter represent record highs in the six-year history of the Index, which is a very promising sign,” says Cynthia Smith, senior vice president, Regional Business at MetLife. “While the current economic conditions may have stalled their plans to grow, the combination of small business owners’ determination, drive and positive outlook bodes well for the future.”
• “Tightening in both credit and private equity markets is creating challenges for many small business owners,” says Sims. “Rising interest rates make it more challenging for some entrepreneurs to qualify for financing, although I have seen several loan guarantee programs step up and assist some of these borrowers in securing funding.”

NFIB Survey

https://www.nfib.com/surveys/small-business-economic-trends/

November 2023

The Optimism Index decreased 0.1 point in November to 90.6

• Owners expecting better business conditions over the next six months increased one point from October to a net negative 42%.

• A net negative 17% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from October and the lowest reading since July 2020.
• The frequency of reports of positive profit trends was a net negative 32%, unchanged from October.
• 43% of all owners reported job openings they could not fill in the current period, down 3 points from October. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18 percent planning to create new jobs in the next three months, up 1 point from October
• The net percent of owners raising average selling prices decreased five points from October to a net 25%
• A net 30% of owners plan to raise compensation in the next three months, up six points from October and the highest since December 2021.
• Sixty-one percent of owners reported capital outlays in the last six months, up four points from October.

October 2023

The Optimism Index decreased 0.1 points in October to 90.7, marking the 22nd month below the 50-year average. The last time the Optimism Index was at or above the average was December 2021.

• Owners expecting better business conditions over the next six months was unchanged from September at a net negative 43% (seasonally adjusted).

• A net negative 17 percent of all owners reported higher nominal sales in the past three months, down 9 points from September and the lowest reading since July 2020. The net percent of owners who expect real sales to be higher increased three points from September to a net negative 10%.
• The frequency of reports of positive profit trends was a net negative 32%, down eight points from September.
• 43% of all owners reported job openings they could not fill in the current period, unchanged from September. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, down 1 point from September
• The net percent of owners raising average selling prices increased 1 point from September to a net 30 percent seasonally adjusted. Seasonally adjusted, a net 33 percent plan price hikes (up 3 points). Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, down one point from last month.
• Seasonally adjusted, a net 24% plan to raise compensation in the next three months, up one point from September.
• Fifty-seven percent reported capital outlays in the last six months, unchanged from September.
• The average rate paid on short maturity loans was 9.1 percent, down 0.7 percentage points from last month’s highest reading since December 2006. Twenty-seven percent of all owners reported borrowing on a regular basis (down 4 points).

September 2023

The NFIB Small Business Optimism Index decreased half of a point in September to 90.8. September’s reading marks the 21st consecutive month below the 49-year average of 98.

• Small business owners expecting better business conditions over the next six months deteriorated six points from August to a net negative 43% seasonally adjusted, however, 18 percentage points better than last June’s reading of net negative 61% and definitely at recession levels.
• Forty-three percent (seasonally adjusted) of owners reported job openings that were hard to fill, up three points from August and remaining historically high as owners can’t hire enough workers due to few qualified applicants.
• Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18 percent planning to create new jobs in the next three months, up 1 point from August and 14 points below its record high reading of 32 percent reached in August 2021. Overall, 61 percent reported hiring or trying to hire in September, down 2 points from August.
• The net percent of owners raising average selling prices increased two points to a net 29% seasonally adjusted, still a very inflationary level. Seasonally adjusted, a net 30 percent plan price hikes (unchanged).
• Seasonally adjusted, a net 23% plan to raise compensation in the next three months, down three points from August.
• A net negative 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up six points from August’s lowest reading since August 2020. The net percent of owners expecting higher real sales volumes improved one point to a net negative 13%.
• The frequency of reports of positive profit trends was a net negative 24%, up one point from August.
• The average rate paid on short maturity loans was 9.8 percent, 0.8 of a percentage point above last month. Thirty-one percent of all owners reported borrowing on a regular basis (up 3 points).

August 2023

https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-August-2023.pdf

https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-August-2023.pdf

The Optimism Index decreased 0.6 of a point in August to 91.3. This is the 20th consecutive month below the 49-year average of 98

• Small business owners expecting better business conditions over the next six months deteriorated seven points from July to a net negative 37%, however, 24 percentage points better than last June’s reading of a net negative 61% but still at recession levels.
• Forty percent of owners reported job openings that were hard to fill, down two points from July but remain historically high.
• Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 17% planning to create new jobs in the next three months. Overall, 59 percent reported hiring or trying to hire in August, down 2 points from July.
• A net negative 14% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, the lowest reading since August 2020. The net percent of owners expecting higher real sales volumes declined two points to a net negative 14%.
• The net percent of owners raising average selling prices increased two points from July to a net 27% (seasonally adjusted). Seasonally adjusted, a net 30 percent plan price hikes (up 3 points).
• Seasonally adjusted, a net 36% reported raising compensation, down two points from July. A net 26% of owners plan to raise compensation in the next three months, up five points.
• The frequency of reports of positive profit trends was a net negative 25%, up five points. Among owners reporting lower profits, 28% blamed weaker sales, 24% blamed the rise in the cost of materials, 15% cited labor costs, 10% cited lower prices, 5% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 45% credited sales volumes, 29% cited usual seasonal change, and 12% cited higher selling prices.
• A net 24 percent of owners reported paying a higher rate on their most recent loan, up 1 point from July. The average rate paid on short maturity loans was 9.0 percent, half of a percentage point above last month. Twenty-eight percent of all owners reported borrowing on a regular basis (up 1 point).

July 2023

https://www.nfib.com/surveys/small-business-economic-trends/

The NFIB Small Business Optimism Index increased 0.9 of a point in July to 91.9, marking the 19th consecutive month below the 49-year average of 98.

“With small business owners’ views about future sales growth and business conditions dismal, owners want to hire and make money now from solid consumer spending,” said NFIB Chief Economist Bill Dunkelberg. “Inflation has eased slightly on Main Street, but difficulty hiring remains a top business concern.”

Insights:

• Owners expecting better business conditions over the next six months improved 10 points from June to a net negative 30%, 31 percentage points better than last June’s reading of a net negative 61%. This is the highest reading since August 2021 but historically very negative.
• Forty-two percent of owners reported job openings that were hard to fill, unchanged from June but remaining historically very high.
• The net percent of owners raising average selling prices decreased four points to a net 25% seasonally adjusted, still a very inflationary level but trending down. This is the lowest reading since January 2021.
• 

  https://www.nfib.com/surveys/small-business-economic-trends/
  The net percent of owners who expect real sales to be higher improved two points from June to a net negative 12%, a very pessimistic perspective. A net negative 13 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 3 points from June.
• The frequency of reports of positive profit trends was a net negative 30%, down six points from June. Among owners reporting lower profits, 30% blamed weaker sales, 19% blamed the rise in the cost of materials, 18% cited labor costs, 9% cited lower prices, 5% cited usual seasonal change, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 44% credited sales volumes, 34% cited usual seasonal change, and 9% cited higher selling prices.
• Fifty-five percent of owners reported capital outlays in the last six months, up two points from June. Of those making expenditures, 38% reported spending on new equipment, 22% acquired vehicles, and 15% improved or expanded facilities.
• Seasonally adjusted, a net 38 percent reported raising compensation, up 2 points from June. A net 21 percent plan to raise compensation in the next three months, down 1 point from June.

June 2023

https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-June-2023.pdf

Small Business Optimism Index increased 1.6 points in June to 91.0, however, it is the 18th consecutive month below the 49-year average of 98.

"Small business owners remain very pessimistic about future business conditions and their sales prospects. But in some industries, such as construction, health care, transportation and some consumer services, spending and therefore labor demand remains strong. But overall, the number of firms reporting employment gains has been falling gradually. Capital spending and inventory investment are down. Overall, economic growth is falling. This will help put a damper on inflation, but at the cost of lower employment."

Insights:

• Small business owners expecting better business conditions over the next six months improved 10 points from May to a net negative 40%, 21 percentage points better than last June’s reading of a net negative 61%.
• Twenty-five percent of owners plan capital outlays in the next few months. Overall, business investment is weak.
• A net negative 10% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down two points from May. The net percent of owners expecting higher real sales volumes improved seven points to a net negative 14%. A very negative outlook for the second half.
• A net negative 3% of owners plan inventory investment in the coming months, a weak number.
• The net percent of owners raising average selling prices decreased three points from May to a net 29% seasonally adjusted, the lowest since March 2021. Seasonally adjusted, a net 31 percent plan price hikes (up 2 points).
  

  https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-June-2023.pdf
• Seasonally adjusted, a net 36% of owners reported raising compensation, down five points from May. A net 22% plan to raise compensation in the next three months.
• The frequency of positive profit trends was a negative net 24%, up two points from May. Among owners reporting lower profits, 28% blamed weaker sales, 24% blamed the rise in the cost of materials, 13% cited the usual seasonal change, 10% cited labor costs, 8% cited lower prices, and 4% cited higher taxes or regulatory costs.
• Two percent of owners reported that financing was their top business problem, down two points from May. Credit remains available but the price is rising as the Federal Reserve raises its policy rate.
• The average rate paid on short maturity loans was 9.2 percent, 1.4 percentage points above May’s reading. This was the highest since June 2007.

Labor Insights:

• Forty-two percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from May.
• The difficulty in filling open positions is particularly acute in the manufacturing, construction, and transportation sectors where compensation gains are more frequently reported. Openings are lowest in the agriculture and finance sectors.
• Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 15 percent planning to create new jobs in the next three months, down 4 points from May and 17 points below its record high reading of 32 reached in August 2021.
• Overall, 59 percent reported hiring or trying to hire in June, down 4 points from May.

May 2023

https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-May-2023.pdf

The Optimism Index increased 0.4 points in May to 89.4. This is the 17th consecutive month below the 49-year average of 98. The last time the Index was at or above the average was December 2021. Of the 10 index components, 4 increased, 5 decreased, and 1 was unchanged.

"Overall, small business owners are clearly in a recession mood, expressing great concern for future business conditions. But until customers stop coming in, owners (especially in services) will continue to try to hire workers, increasing compensation to attract applicants and retain their current workforce."

• 25% of small business owners reported that inflation was their single biggest problem (up 2 points from April).
• 32% of small businesses raised their prices (down 1 point from April).
• -8% of small business owners reported higher sales in the past 3-months (1 point better than April) and the percentage expecting higher sales dropped 3 points to -21%.
• -50% of business owners are expecting better overall business conditions (1 point worse than April and 11 percentage points better than a year ago).
• 57% of small business owners reported capital outlays in the last 6-months (up 1 point from April) and 25% are planning capital purchases in the next 3-months (up 6 points from April), a very positive move but historically low.
• 

  https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-May-2023.pdf
  44% of small business owners report job openings they cannot fill (down 1 point from April) and 19% plan on hiring in the next 3-months (up 2 points from April). The difficulty in filling open positions is particularly acute in the construction, transportation, and manufacturing sectors where compensation gains are more frequently reported. Openings are lowest in the agriculture and finance sectors.
• 41% of small businesses raised compensation (up 1 point from April) and 22% plan on raising compensation in the next 3-months (up 1 point from April).
• Overall, 63 percent reported hiring or trying to hire in May, up 3 points from April. Fifty-five percent (89 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (unchanged).
• 27% of small business owners reported all their credits needs are met (down 3 points from April).  63% said they were not interested in a loan (up 4 points) and 1% of small business owners reported that their borrowing needs were not satisfied (down 1 point from April).
• Four percent reported that financing was their top business problem (unchanged). A net 24 percent of owners reported paying a higher rate on their most recent loan, down 2 points from April. The average rate paid on short maturity loans was 7.8 percent, 0.7 percentage points below April’s reading
• Twenty-nine percent of all owners reported borrowing on a regular basis (down 2 points).

ADP Employment

See: ADP Employment

https://adpemploymentreport.com/

The ADP National Employment Report is published monthly by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab. An independent estimate of private-sector employment and pay, the report is based on data derived from ADP client payrolls. The jobs report and pay insights use ADP’s fine-grained anonymized and aggregated payroll data of over 25 million U.S. employees to provide a representative picture of the labor market

The CFO Survey

Q3 2023

Financial decision-makers ranked monetary policy as their top business concern, as higher interest rates have curtailed spending at approximately 40 percent of companies. The CFO outlook is brighter for 2024, however, with higher revenues and hiring expected next year, along with smaller increases in prices and input costs.

“Monetary policy appears to be further dampening business spending and hiring plans,” said John Graham, finance professor at Duke University’s Fuqua School of Business and the director of the survey. “Overall, the weak (but still positive) growth in 2023, followed by improved prospects in 2024, suggests that policymakers may yet pull off a soft landing for the U.S. economy.”

• Respondents expect employment growth to increase to nearly 4 percent in 2024, up from about 1 percent this year.
• Price and unit cost growth are both expected to temper in 2024, including the wage bill.
• Revenues are expected to rebound from an average of 3 percent growth in 2023 to more than 6 percent in 2024.
• CFOs assign a 19-percent chance of negative GDP growth over the next 12 months, down from 24 percent in last quarter’s survey.
• The CFO Optimism Index improved slightly this quarter, compared with last quarter.

CFOs' Growth Expectations for Their Own Firms, by Response Quarter	Q3 2023		Q2 2023
Mean (and Median) Expected Year-Over-Year Percentage Change for Calendar Years	2023	2024	2023	2024
Revenue	3.0% (5.0%)	6.5% (5.0%)	2.9% (5.0%)	6.7% (5.0%)
Price	5.9% (5.0%)	4.3% (3.5%)	4.6% (3.8%)	5.0% (3.0%)
Unit Cost	6.8% (4.5%)	5.0% (4.0%)	6.8% (5.0%)	5.7% (3.0%)
Employment (full-time)	1.1% (0.0%)	3.9% (2.2%)	6.1% (2.5%)	2.7% (1.5%)
Wage Bill	5.9% (4.5%)	5.4% (4.0%)	6.5% (5.0%)	5.9% (4.0%)

Note: Q3 2023 data in the table reflect results for 250 to 317 U.S. firms responding to the Q3 2023 survey (August 21 – September 8, 2023). Results from the Q2 2023 survey (May 24 – June 9, 2023) are shown for comparison (for 295 to 326 firms). Revenue, Price, and Unit Cost are weighted by sales revenue. Employment and Wage Bill are weighted by employment. These data are also winsorized at 2.5% and 97.5% to remove the potential influence of extreme values.

Q2 2023

Financial decision-makers lowered their expectations for U.S. economic growth in the next year, with almost 40 percent of small firms expecting that tighter financing will curtail business spending.

• 32 percent of small firms reported that since the start of 2023, financing conditions have constrained their firm's investment or spending plans, compared to only 19 percent of large firms.
• 40 percent of small firms have already or expect to change their investment or spending plans in light of tighter financing compared to only 26 percent of large firms. When asked why access to or the cost of financing was not constraining their investment plans, large firms were much more likely than small firms to reply that they faced favorable financing, while also being less likely to say that they don't finance spending with debt.
• Small and large firms reported that if access to or the cost of financing constrained spending, it would primarily hinder the pursuit of new business opportunities. Small firms were more likely than large firms to report an impact on their ability to refinance or pay down debt and, to a lesser extent, repair or replace existing capital assets.
• Since small firms are more likely to be constrained in their ability to finance new business opportunities, perhaps it is not surprising that their expectations for revenue growth in 2023 were also below those of large firms (median of 4 percent versus 5 percent).
• On average, compared to large firms, small firms report being more affected by tight financing conditions, are less optimistic about the economy and their own prospects, and expect lower revenue growth in 2023.

CFOs' Growth Expectations for Their Own Firms, by Response Quarter	Q2  2023		Q1 2023
Mean (and Median) Expected Year-Over-Year Percentage Change for Calendar Years	2023	2024	2023	2024
Revenue	2.9% (5.0%)	6.7% (5.0%)	7.2% (6.0%)	7.1% (5.0%)
Price	4.6% (3.8%)	5.0% (3.0%)	5.2% (5.0%)	4.0% (4.0%)
Unit Cost	6.8% (5.0%)	5.7% (3.0%)	6.0% (5.0%)	4.6% (4.0%)
Employment (full-time)	6.1% (2.5%)	2.7% (1.5%)	2.2% (2.6%)	3.4% (2.5%)
Wage Bill	6.5% (5.0%)	5.9% (4.0%)	7.1% (5.0%)	5.9% (4.0%)

CFOs’ Expectations for Real GDP Growth Over Next Four Quarters, by Response Quarter	Q2 2023	Q1 2023
Weighted Mean	1.0%	1.4%
Weighted Median	0.8%	1.3%
Probability of Negative Growth	24.5%	19.3%

Small Business Index

The MetLife & U.S. Chamber of Commerce Small Business Index is released on a quarterly basis and is compiled from 750 unique online interviews with small business owners and operators each quarter.

Methodology: https://www.uschamber.com/sbindex/methodology

Q3 2023

The Q3 2023 MetLife & U.S. Chamber of Commerce Small Business Index rises to 69.2 this quarter, an increase since last quarter (63.1) and the highest reading since the start of the COVID-19 pandemic in early 2020.

• Currently, one-third (33%) of small businesses say the U.S. economy is in good health, a nine-percentage point increase from last quarter. 38% feel the same about their local economy (up eight percentage points from Q2).
• Small businesses are feeling better about their business health: Two in three (66%) small businesses report that their business is in good health. This is a nearly 10 percentage-point increase from last quarter.
• 71% say they expect next year’s revenue to increase, the highest levels recorded since the start of this survey (Q2 2017). In addition, 42% of small businesses say they plan to increase investment in the next year and two in five (40%) small businesses say they anticipate increasing staff in the next year.
• A majority (52%) of small businesses continue to report that inflation is their biggest challenge, a consistent pattern over the past year. This is near a record high and consistent across regions, business size, and sector.
• A majority (56%) of small businesses say keeping up with employee salary expectations is a challenge.
• At the same time, slightly fewer small businesses say that rising interest rates are limiting their ability to raise capital or financing for their business (70% in Q3 vs. 76% in Q2 2023).
• 70% of small businesses say they are actively addressing employee mental health as a priority right now. This prioritization has increased since Q3 2021, when 60% said the same.

Q2 2023

“The challenges of our current economy may have delayed some small business owners’ plans to expand or hire more staff, but now they see opportunity for growth on the horizon,” said Tom Sullivan, Vice President of Small Business Policy at the U.S. Chamber of Commerce. "Small businesses are again showing remarkable resiliency. There has been a strong majority reporting that their business is in good health over the last year and it’s clear many have high expectations for the future.”

• Three in ten (30%) small businesses say their local economy is good, a stable reading from Q1 2023 (29%) and extending a year-long plateau in perceptions of local economies after a drop between Q2 and Q3 2022.
• About three in five (59%) small businesses say the overall health of their business is very or somewhat good.
• (64%) small business owners say they are comfortable with their cash flow. This has remained stable for the past three quarters, following a seven-percentage point drop between Q2 and Q3 2022.
• Most small businesses report steady staffing levels. Sixty-four percent say their business has retained the same staff size over the past year, while nearly a quarter (23%) say they have increased staff. T
• Record high share of small business owners (71%) expect their revenue to increase in the next year.
• A record-high share also anticipates hiring more staff in the next year (47% up from 37% last quarter).

• More than three-quarters (76%) say that rising interest rates are limiting their ability to raise capital, up from 66% who said the same last quarter. Of the 26% that had used a variable rate loan, 53% have converted it into a fixed rate loan.

• 73% of small businesses say it’s harder to borrow money for their business from banks because they are tightening lines of credit. Likewise, 74% express concern about rising interest rates making it harder to pay back current business loans.
• A majority (54%) of small businesses rate inflation as their largest challenge. This matches past highs from the Index and has remained consistent since Q3 2022. Consistent with last quarter, supply chain issues (23%), rising interest rates (23%), and revenue (20%) remain second-tier concerns behind inflation.

Q1 2023

“This quarter, small businesses’ concerns over inflation are soaring and their view of the broader economy is darkening, though they still report that their own businesses are in good health,” said Tom Sullivan, Vice President of Small Business Policy at the U.S. Chamber of Commerce. “Small business owners are pulling back a bit on spending as they see storm clouds in the economy appearing ahead.”

• One in five (20%) small business owners believe the U.S. economy is in good health, down from 27% saying the same last quarter.
• Fewer small businesses say they plan to increase investment over the next year (38% vs. 47% last quarter).
• Despite small business owners seeing a weak economy, a majority (63%) say their business is in good health and 64% are comfortable with their cash flow, both stable over the last couple of quarters.
• Seven in 10 (69%) say they have retained the same number of employees over the past year and 19% report increasing staff over the same period.
• Small businesses owners cite various barriers to securing financing for their business including a time-consuming application process (52%), not having enough information on available sources of capital (46%), and not having enough revenue or assets to qualify for a loan (46%).
• A majority of small business owners (62%) say that rising prices have forced them to seek out additional capital or financing for their business in the past year. But two-thirds of small businesses (66%) say that rising interest rates are limiting their ability to raise capital or financing for their business.
• Almost half of the small business owners (49%) say their current access to capital or loans is good. This is slightly, but not significantly, lower than the share that rated their access to capital as good in Q2 2022 (54%). However, this is significantly lower than in Q2 2017¹ when 67% said their access to capital or loans was good.
• Perceived access to capital also increases with the number of employees a business has. Nearly three in four (73%) small businesses with 20-500 employees say they have good access to capital, compared to 55% of those with 5-19 employees, and just 41% of those with fewer than five employees.
• A majority of small businesses rely on their personal savings (69%), credit cards (64%), and local banks or credit unions (53%) for capital/loans.
• When it comes to providing healthcare for employees, 85% of small business owners believe offering healthcare helps attract and retain employees

Top challenges:

• Inflation costs – 54%
• Revenue – 22%
• Supply chain issues – 21%
• Interest rates rising – 16%
• Employee retention – 11%
• Affording healthcare/benefits – 10%

Small Business Credit Survey

2022

Employer Firms

The 2022 SBCS yielded 7,864 responses from a nationwide convenience sample of small employer firms with 1–499 full- or part-time employees (hereafter “firms”) across all 50 states and the District of Columbia.

• Performance indices for revenue and employment growth increased from lows in the 2020 survey. Still, both performance indices remain substantially beneath those from prepandemic surveys.
• Share of firms operating at a profit rose from 35% in the 2021 survey to 45% in the 2022 survey.
• Year-over-year, firms’ self-reported financial condition remains little-changed from 2021. Seventeen percent of firms reported that they were in “very good” or “excellent” financial condition, 19% were in "poor" condition.
• Between 2021 and 2022, the net share of firms expecting revenue growth in the next 12 months fell from 42% to 35% and remains significantly below prepandemic levels.
• The net share of firms anticipating growth in employment levels also declined, falling from 31% in 2021 to 27% in 2022.
• Share of firms with outstanding debt has nearly returned to prepandemic levels (26%), the share of firms holding larger amounts of debt—more than $100K—remains higher than in 2019. (40% vs 31%).
• 40% of employer firms sought loans, lines of credit, or cash advances in the prior 12 months. 34%of employer firms sought pandemic-related financial assistance in the prior 12 months.

Other Surveys

American Express Small Business Financial Confidence Report

May 2023

Online survey was conducted between March 20 – 30, 2023, surveying 550 small business leaders, including 250 at the smallest small business (<10 employees), 200 at a medium small business (11-100 employees), and 100 at the largest small business (101-500 employees).

54% of small business owners surveyed stated they feel very confident in their ability to make sound growth decisions for their business. When broken down by business size, only 29% of the smallest small businesses say they feel very confident in their ability to make sound growth decisions, compare to 64% of largest ones.

• 41% said that their business is currently prioritizing artificial intelligence to help make business decisions. By size, 16% of small businesses with the fewest employees surveyed say they see the benefits of AI. That percentage more than quadruples among the largest small businesses (75%).
• U.S. small businesses surveyed are turning to artificial intelligence (AI) tools to help them save time (39%), improve data security (21%), and provide more efficient customer service within their business (20%).
• Of those who are not currently prioritizing artificial intelligence, almost 2-in-3 (65%) say they would consider or would maybe consider using AI in the future.
• The report also revealed that over half (51%) of the small businesses surveyed are currently hiring, with the largest small businesses much more likely to be hiring (89%), compared to the smallest small businesses (20%). Large and medium small businesses are twice as likely to be hiring due to financial growth than smaller businesses.
• Reasons for the smallest group discontinuing hiring include a limited hiring budget, slow or stagnant growth, and a lack of personnel to hire and manage new employees. Regarding the latter, the survey found that almost 1-in-4 small businesses have had difficulties hiring and have spent too much time on interviewing.
• 41% of small businesses surveyed ‘often’ or ‘always’ turn down potential opportunities because they are unsure about their cash flow.

TD Bank’s Small Business Survey

June 2023

The survey collected insights from over 500 small business owners (SBOs), with between $250,000 and $5 million in annual revenue, on the challenges, priorities, and trends heading into the second half of 2023.

In addition to 62% of business owners naming inflation as one of their primary business concerns, other top areas of concern were:

• Employee retention and management (24%)
• Product shortages (21%)
• Keeping up with the competition (20%)

“In response to rising interest rates and inflation driving up the cost of doing business, small business owners have had to increase spending to stay competitive," said Chris Giamo, Head of Commercial Banking at TD Bank. "That, coupled with consumers rethinking spending habits, means that inflation is making it harder for businesses on multiple fronts to increase profits and revenue.

• 80% of small businesses voiced optimism about how they will do in the next 12-months, with 20% worried about surviving.
• Neary one in five (17%) SBOs identified surviving as a business as their top priority for the second half of 2023. For 35% of SBOs, this means applying for a loan or line of credit this year
• 70% of small employers are prioritizing staff retention.  26% are focusing on new hires, and 4% are reducing staff.

Funding

Senior Loan Officer Opinion Survey

Small firms are those with annual sales of less than $50 million.

https://www.federalreserve.gov/data/documents/sloos-202304-fullreport.pdf

Q1 2023

Tightened standards had increased considerable for small firms, but no different than largests ones.

Demand for loans look significantly low already, as levels seen in 2008, 2002 only. This is expected due to higher rates, it could be reasonabe to think than investment in small firms will remain low.

Standards for small firms (annual sales of less than $50 million)

	All Respondents		Large Banks		Other Banks
	Banks	Percent	Banks	Percent	Banks	Percent
Tightened considerably	2	3.3	0	0.0	2	6.7
Tightened somewhat	27	45.0	16	53.3	11	36.7
Remained basically unchanged	30	50.0	14	46.7	16	53.3
Eased somewhat	1	1.7	0	0.0	1	3.3
Eased considerably	0	0.0	0	0.0	0	0.0
Total	60	100	30	100	30	100

Demand for C&I loans from small firms (annual sales of less than $50 million)

		All Respondents			Large Banks		Other Banks
		Banks		Percent	Banks	Percent	Banks	Percent
Substantially stronger		0		0.0	0	0.0	0	0.0
Moderately stronger		5		8.3	3	10.0	2	6.7
About the same		18		30.0	10	33.3	8	26.7
Moderately weaker		34		56.7	17	56.7	17	56.7
Substantially weaker		3		5.0	0	0.0	3	10.0
Total		60		100	30	100	30	100

Future Expectations C&I loans orcredit lines to small firms

	All Respondents		Large Banks		Other Banks
	Banks	Percent	Banks	Percent	Banks	Percent
Tighten considerably	2	3.4	0	0.0	2	7.1
Tighten somewhat	29	49.2	14	45.2	15	53.6
Remain basically unchanged	28	47.5	17	54.8	11	39.3
Ease somewhat	0	0.0	0	0.0	0	0.0
Ease considerably	0	0.0	0	0.0	0	0.0
Total	59	100	31	100	28	100

Goldman Sachs Research

Small businesses rely disproportionately on small banks for borrowing, receiving almost 70% of their commercial and industrial loans from banks with less than $250 billion in assets and 30% from banks with less than $10 billion in assets (versus 45% and 10% for larger businesses, respectively.

• At least 70% of small business lending is done by smaller banks in 95% of counties, which account for more than 80% of GDP.
• Bank stress is likely to reduce lending growth by 2-6 percentage points, according to estimates from Goldman Sachs Research. “Because small banks are likely to tighten credit more aggressively and small businesses disproportionately borrow from them, the hit to lending to small businesses will likely be larger"
• In places where they don’t operate, bigger institutions may be more reluctant to lend to small businesses that aren’t already customers because it’s harder to assess the riskiness of loans to individual small businesses. Part of the reason that small banks disproportionately lend to small businesses in the first place is because their closer geographic proximity to individual small businesses gives them an informational advantage in gauging the creditworthiness of those borrowers.
• In many counties across the U.S., there’s no nearby alternative to smaller banks. There isn’t a globally systemically important bank (GSIB) branch in roughly two thirds of counties, making up 10% of U.S. GDP, according to Goldman Sachs Research.

Past Recessions

2008

New York Fed Research

The 2007-09 downturn has had a deeper employment impact on small businesses than on large ones. Small firms attribute the relatively steep decline in jobs mostly to poor sales and economic uncertainty—problems that also affected large firms, but to a lesser degree. Tightened access to credit and adverse financial conditions also constrained small firms but a more important factor was the decline in new investment and associated financing in the face of weak consumer demand for the firms’ products and services

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf

• Regardless of sector, small firms experienced greater employment declines than large firms did.
• Senior Loan Officer Opinion Survey indicates that firms of different sizes have experienced similar changes in the loan standards and interest rate spreads imposed by banks, and that the prevalence of a decrease in credit supply is similar across all firms. Credit supply is not the main reason why the small firms were affected more adversely than large ones during the recession.
• Literature suggests that small firms tend to rely more on credit obtained through intermediaries, such as banks, while larger firms have more varied sources of fi nancing, such as direct credit, including the issuance of equity, corporate bonds, and commercial paper. According to balance-sheet data presented in the Quarterly Financial Report, bank loans represent two-thirds of the total debt of small firms, compared with one quarter for larger firms.
• Bank loans have declined significantly since the start of the recession. In particular, commercial and industrial loans fell approximately 20 percent from March 2008 to June 2010. Moreover, credit card use by small business owners has contracted 7%
• The plunge in real estate prices has thus put further downward pressure on the borrowing capacity of these individuals., 16 percent of small business owners have taken out home equity loans to fi nance operations.
• NFIB survey reveals that the share of small businesses reporting poor sales as the most important problem has increased dramatically, while the relative significance of other factors, such as insurance costs and the availability and quality of labor, has diminished. Few establishments cite financial conditions and interest rates as the main obstacle, a trend that has remained stable throughout the recession.
• This reduced consumer interest in the products of small fi rms likely lowered the firms’ demand for credit. In these scenarios, firms do not have the ability to invest and thus have little need to borrow.
• Total debt of small firms started to decline in fourth-quarter 2008 and has not begun to recover as of second-quarter 2010. Meanwhile, total debt of large firms (with more than $50 million in total assets) continued to increase throughout the recession.
• The behavior of sales has been similar for small and large fi rms until recently. Sales started to recover among large manufacturing fi rms in second-quarter 2009, while sales of small firms have lagged and their recovery has been sluggish.
• Growth in inventories for small and large firms has fallen since fourth-quarter 2008, but it has declined more sharply for small firms. Fixed investment dropped significantly among small firms, and there has been no sign of recovery. In contrast, fixed investment by large fims has shown a sharp increase.

Average Business Size and Sectoral Employment Declines

	Average Business Size (Number of Employees)	Employment Decline, 2007-09 (Percent)
Category	2007	Total	1-49 Employees		50-499 Employees	500+ Employees
Construction	11.7	-19.4	-20.1		-20.4	-14.4
Manufacturing	45.7	-12.4	-12.1		-13.3	-12.2
Transportation and public utilities	22.1	-4.8	-7.9		-4.5	-4.0
Wholesale trade	15.1	-5.3	-8.1		-6.1	-2.5
Retail trade	17.0	-3.2	-4.7		-5.3	-1.8
Finance, insurance, and real estate	11.4	-6.3	-8.5		-3.9	-6.0
Services	17.3	-0.8	-1.6		-0.2	-0.5
All	17.1	-4.4	-5.8		-5.1	-3.3