Small business trends improve, but outlook remains cloudy - Fed survey

Small business conditions are returning to prepandemic norms, the Federal Reserve's survey of small-business owners found, although more companies are uncertain about growth this year as financial and operational challenges persist.

Firms polled in the 2022 Small Business Credit Survey were more likely to report that revenue and employment levels increased rather than decreased in the past 12 months. This is the first such finding since the 2020 survey.

Also, the number of respondents operating profitably rose from 35% in the 2021 survey to 45% in 2022.

The survey yielded 7,864 responses from a nationwide convenience sample of small businesses with 1-499 employees.

Cloudy Outlook

On the other hand, businesses remain uncertain about their future. While revenue, employment, and profitability improved from 2021, expectations have worsened.

The share of respondents expecting revenue growth in 2023 fell from 42% to 35%, and remains significantly below prepandemic levels. The share of respondents expecting increased employment also declined, from 31% in 2021 to 27% in 2022.

Uncertainty stems from continued financial and operational challenges. The survey found that about four in five companies faced challenges related to rising costs, and nearly half of the respondents reported difficulties paying operating expenses or navigating uneven cash flows. Operationally, firms struggled with hiring/retaining qualified staff or supply chain issues.

According to National Federation of Independent Business' latest report on small business trends, inflation remains a top problem. "While inflation is starting to ease for small businesses, owners remain cynical about future business conditions," said Bill Dunkelberg, chief economist, NFIB. "Owners have a negative outlook on the small business economy but continue to try to fill open positions and return to a full staff to improve productivity."

Funding sources

The Fed's survey found that small businesses were more likely to use personal and government sources for funding, rather than financial institutions. Two-thirds of respondents used personal savings or funding from friends/family in the past five years.

Meanwhile, the application rate for traditional financing rebounded to prepandemic levels. The share of respondents that were fully approved increased Y/Y, but remained lower than in 2019.

A recent JPMorgan survey found that small and midsized firms are more confident about their prospects than the economy's.