Small Businesses Grapple with Persistent Inflationary Pressures Despite Easing Rates
The latest Biz2Credit Small Business Earnings Report paints a concerning picture of the financial health of small businesses in America. Despite a notable decline in inflation from the peaks of early 2023, the report, which analyzed data from nearly 200,000 small businesses, reveals that the lingering effects of high inflation continue to erode earnings, even as the Federal Reserve nears its 2% target rate. This persistent pressure stems from a complex interplay of rising expenses, sticky inflation, and the inability of many small businesses to increase prices sufficiently to compensate.
The report documents a troubling trend. While earnings initially rose as inflation began to fall in early 2023, this improvement was short-lived. Expenses, though initially rising slower than revenues, ultimately began to climb at an alarming rate, outpacing revenue growth and driving earnings down. This divergence is clearly illustrated by the report’s data, which shows earnings peaking at $213,200 in September 2023 before plummeting to $35,000 just six months later in March 2024. This volatility underscores the precarious financial position of many small businesses.
The underlying driver of this financial strain is the sustained increase in operational costs. Average expenses saw a relentless climb throughout 2023 and into early 2024, reaching a peak of $575,300 in April 2024. Although expenses have moderated somewhat since then, the decline in revenues has been even more pronounced, resulting in a continued squeeze on profitability. This dynamic is highlighted by the November 2024 figures, which showed average earnings at their second-lowest point in nearly two years, a mere $44,500.
This trend of dwindling profits underscores the challenges faced by small businesses in a post-high-inflation environment. The so-called “stickiness” of inflation, remaining stubbornly above the Federal Reserve’s 2% target, continues to exert significant pressure. While the overall inflation rate has fallen considerably from the highs of 2022, the cumulative impact of elevated costs over the past two years has significantly reshaped the operating landscape for small businesses. They are caught in a difficult position, unable to fully offset increased expenses through price adjustments, leading to a sustained erosion of profit margins.
Several key factors contribute to this predicament. Rising labor costs are a major concern, particularly with minimum wage increases in several states. This puts a disproportionate burden on small businesses, which often have less flexibility in managing labor costs compared to larger corporations. For businesses in sectors like personal care services, where automation is not a viable option, these rising labor costs pose an even greater challenge. Fixed costs, such as rent and insurance, have also seen significant increases, further exacerbating the financial strain. The rebounding commercial real estate market, particularly in major cities, has contributed to higher rents, adding another layer of difficulty for small businesses already grappling with shrinking profit margins.
Looking ahead to 2025, the outlook for small businesses remains uncertain. While consumer spending has shown resilience, particularly during the recent holiday shopping season, the underlying economic pressures remain a concern. The Biz2Credit report suggests that the first half of 2025 could be particularly challenging for small business owners, as they navigate the ongoing impact of sticky inflation and persistent cost increases. The hope is that a renewed focus on cutting government spending and stimulating economic growth will alleviate these pressures and create a more favorable environment for small businesses to thrive in the latter half of the year. However, the extent to which these policy initiatives will materialize and effectively address the underlying economic challenges remains to be seen. The resilience and adaptability of small businesses will be critical in navigating these uncertain times and ensuring their long-term survival and success.
