Size Matters: How Are Small Businesses Doing?

Around the start of the pandemic, the number of new business applications skyrocketed and stayed high. While some of the recent surge was driven by businesses with no plans to hire, business applications associated with likely employers have also increased by approximately 35 percent since the pandemic and remained strong over the past four years, according to research by Richmond Fed senior economist Chen Yeh. Many of these are retail businesses, perhaps capitalizing on the increased share of e-commerce, which has grown from 11 percent of retail sales in 2019 to 17 percent in 2026. Startups are more likely to hire new workers and workers with less education, so this growth in new businesses could help those who typically face the greatest headwinds in the labor market.

At the same time, small businesses have recently expressed more doubts about their future than larger firms. Over the last two years, Richmond Fed business surveys have found that among businesses in the Fifth District, small firms are less optimistic about employment and new orders. Nationally, The CFO Survey conducted by the Richmond and Atlanta Feds and Duke University's Fuqua School of Business found that smaller firms were less optimistic both about the overall economy and their own prospects.

One driver of diverging perspectives for small and large businesses may be the funding environment. Larger companies that can access capital markets to issue public bonds were able to issue debt at fixed rates in 2021, meaning that their interest expenses did not change when rates increased. In contrast, most small business loans are floating rate, so their interest rates have gone up. In addition to the strains of higher interest rates, small business borrowers have reported that banks, credit unions, and community development financial institutions were either tightening their underwriting standards, increasing requirements, or delaying approvals, thereby increasing borrowing costs across a range of products. For example, only 52 percent of small businesses in the Federal Reserve's Small Business Credit Survey (SBCS) reported their financing applications were fully approved in 2025, down from 62 percent in 2019.

Surveys of banks reinforce these findings: Most report having tightened lending standards considerably since the collapse of Silicon Valley Bank in 2023. The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices confirms that bank lending standards for small firms tightened on net since 2023, trending toward flat conditions only recently. The Fed surveys small businesses each year and when asked how businesses are responding to financial challenges, reliance on personal funds is their leading (and growing) answer. This represents high personal risk for owners, and limited external funding access constrains growth.

Anecdotally, bankers are ready and willing to lend to creditworthy businesses but find that prospective borrowers may lack the financials. Small businesses have been hard hit by ongoing variability from changes to tariffs and gas prices, which are harder to manage for less diversified, smaller businesses. According to the 2025 SBCS, fewer than 14 percent of small businesses changed to domestic suppliers or adjusted among foreign suppliers in response to tariffs. In contrast, those adjustments were visible across the whole economy: Imports from China fell by more than 40 percent, while those from Vietnam rose by the same percentage.

Looking ahead, artificial intelligence (AI) represents both a gap and an opportunity for small businesses. Using responses to The CFO Survey, researchers at the Richmond and Atlanta Feds and Duke University found that 80 percent of large firms but only around 50 percent of small firms reported investing in AI, although both groups expect to continue growing those investments. And my colleague Yeh found that sectors more exposed to AI saw more business applications, consistent with AI lowering the cost of starting a business. That bodes well for small businesses to continue to grow the U.S. economy.