Small business growth outpaced pandemic-era rates in 2023 but remained underwhelming due to operational challenges and an unforgiving financing landscape.
According to the latest Small Business Credit Survey from the Federal Reserve, small business performance in 2023 vastly improved over the three preceding years but remained well behind pre-pandemic norms. Of the more than 6,000 entrepreneurs fielded by the Fed for its study, 91% said their companies faced an operational issue last year, while another 93% reported financing difficulties.
Operational challenges were attributed to a variety of factors. Although pandemic-related difficulties were less apparent in 2023 due to the economy’s better-than-expected performance, issues such as supply chain disruptions and labor shortages persisted throughout the year. Roughly two out of five small business owners navigated inventory headwinds, compared to three out of five the year before.
On the other hand, troubles with financing were largely associated with rising costs, reduced lending, and growing debt. An overwhelming majority of small business owners were negatively impacted by price hikes and staff pay raises, while the number of survey respondents holding more than $100,000 in debt rose from 31% the year before the pandemic to 39% in 2023. Although loan approvals were largely stable, fewer entrepreneurs submitted applications for financing than in 2022, likely due to interest rate hikes mandated by the Federal Reserve.
Ultimately, small business performance is recovering from the COVID-19 pandemic faster than anticipated but has yet to reflect normal growth rates. Although the year is just beginning, entrepreneurs are largely still confident that their companies will perform well in the coming months. Now that supply chain challenges are few and far between and interest rates are set to come down this summer, it seems likely that 2024 will see the small business sector draw much closer to its pre-pandemic performance rates than it did in 2023.