Key Findings
- More than half of small businesses have used generative AI. Generative AI has been adopted quickly by small businesses, particularly those with Millennial or Gen Z owners. While marketing is the most common use case, a third of SMBs use Generative AI for customer service through tools like chatbots.
- Entrepreneurs are diverse, but representation is still an issue. While entrepreneurship has become more diverse in recent years, women, as well as Black and Hispanic Americans, are still underrepresented among small-business owners.
- 20% of small businesses hire a family member as their first employee. Entrepreneurs tend to lean on their personal network when they start hiring. More than half of small-business owners have a family member working for them.
- Interest rates and high prices are still a challenge for small-business owners. Around 40% of small-business owners said interest rates have hurt them more this year than last year, while close to half said the same about price changes.
- Small-business owners want action on tax policy and health care costs. Tax complexity and health care costs are the top issues entrepreneurs want to see policymakers address. Each can place a significant burden on small businesses owners’ time and resources.
- Nearly two-thirds of small-business owners offer benefits to their employees. Paid time off is the most popular benefit, followed by retirement plans and health insurance. Businesses with at least 10 employees are more likely to offer health insurance than those with fewer than 10 employees.
Introduction
Entrepreneurs have shown their creativity and resilience in recent years as they’ve navigated the Covid-19 pandemic, the macroeconomic headwinds it produced, and the emergence of new technologies like generative artificial intelligence.
But there are still plenty of challenges small-business owners face today, including elevated interest rates, price changes, and hiring.
We surveyed more than 1,300 small-business owners on the Gusto platform to understand who they are, how they run their firms, and what obstacles they’re up against.
Who Are Small-Business Owners?
They’re diverse, but many groups are still underrepresented
Small-business ownership has become more diverse in recent years, but there’s still work to be done to make entrepreneurship more accessible. While entrepreneurship is on the rise among women and Black and Hispanic Americans, each group is still underrepresented among all small-business owners compared to their share of the U.S. population.
Many have worked for or owned another small business
Many entrepreneurs become involved with small businesses early in their careers and start more than one firm. Forty-three percent of small-business owners worked for a small business owned by a close personal acquaintance before the age of 20, and around half have owned at least two companies over the course of their career.
Side hustles are becoming more popular, and they’re much more common for entrepreneurs than for professionals who exclusively work for someone else. Around 20% of small-business owners have worked for someone who wasn’t a client or customer of their firm in the past year, while around just 5% of the total employed population has multiple jobs.
They tend to become entrepreneurs in their 30s or 40s
More than 75% of entrepreneurs start their first business after they turn 30, and most become a business owner for the first time in their 30s or 40s.
Small Businesses Are Quickly Adopting GenAI
More than half of small businesses have used generative AI
Generative artificial intelligence (GenAI) has been adopted quickly by small-business owners. More than half have at least experimented with GenAI tools, and more than 20% are currently using GenAI technology.
Marketing is the most common use case, with nearly 70% of the small businesses that use GenAI applying it to marketing tasks. A third of firms that use GenAI integrate it into their customer service (e.g., chatbots), recruiting, or market-research operations.
Millennials and Gen Z entrepreneurs are leading the way in GenAI adoption
Around two-thirds of Millennial and Gen Z small-business owners have tried to use GenAI, a higher rate than for Baby Boomer and Gen X entrepreneurs. In what may come as a surprise, Millennial owners are slightly more likely to have used GenAI than their Gen Z counterparts.
Most Small-Businesses have only a few employees, and many hire family members
Nearly ⅔ of employer small businesses have fewer than 5 employees
Most small businesses have between one and five paid employees. Smaller firms tend to rely more on contractors, especially if they have no paid employees.
More than half of small-business owners have a relative working for them
Small-business ownership is often a family affair, and 56% of small-business owners told us that a family member does paid or unpaid work for their business. Hiring relatives lowers the risk that an employee will quickly leave or turn out to be less reliable than expected, though it also limits the talent pool available to a small-business owner.
Entrepreneurs often find their first employee from their personal network
Entrepreneurs often turn to their personal network when hiring their first employee. Nearly half hired someone they knew as their first employee, and more than 20% hired a family member. Using an online job board or recruiting service is much less common.
It’s easy to understand why new-business owners prefer to lean on people they know, or referrals from people they know, for early hires. Early employees tend to do a significant percentage of a new company’s work, and as a result have a major impact on the company’s success. There’s never a guarantee a new hire will work out, but the better an entrepreneur knows their early hires, the easier it is to determine whether they’ll be a good fit.
Smaller businesses have the hardest time hiring
Nearly a third of businesses that have tried to hire this year haven’t been able to find employees who are a good fit. Firms with fewer than 10 employees were more likely (33%) than those with 10 or more employees (16%) to report difficulty hiring.
Attracting qualified candidates can be hard as a small business. It’s difficult to offer top-of-the-market salaries, and you don’t have enough of a track record to reassure candidates that you’ll be around in the years to come.
Small businesses that struggled to hire often either couldn’t attract enough applicants, or couldn’t find applicants with the skills they were looking for. The smallest businesses were most likely to say that applicants had inadequate social or soft skills. These businesses rely on their employees to be agile, learn quickly, and grow with the company – which may explain why they value this trait so highly.
Business Is Going Well For Many Small Businesses, but Economic Headwinds Pose Challenges
Four out of five business owners are satisfied with their firm’s performance
While other surveys have shown rising concern about the outlook of business ownership among entrepreneurs, we found that most small-business owners believe their firm is doing well: four out of five said their business is performing as well as or better than they expected when they started their business. Part of that sentiment may come from the fact that many small businesses opened during the Covid-19 pandemic, which created tremendous uncertainty and a wide range of challenges for business owners that forced them to prepare for the worst.
Successful businesses are more likely to measure customer satisfaction
One of the biggest differences between business owners who feel their firm is successful and those who don’t is whether they measure customer satisfaction. More than two-thirds of owners who say their business is doing better than expected track customer satisfaction, compared to around half of those who say their business is doing worse than expected. Paying close attention to how your customers feel can help you better serve their needs.
Interest rates are making it harder to get financing
The Federal Reserve raised interest rates in 2022 and 2023 to keep inflation in check, and small-business owners continue to feel the pain. Forty percent of small-business owners said interest rates have had a more negative impact on their company this year, the first year that began with rates above 5% in more than a decade, than last year.
Businesses feel the effect of interest rates most directly when they want to borrow money. Nearly 40% of small-business owners who said interest rates hurt their business more this year sought financing, compared to 15% of those who said interest rates didn’t impact them more or less than last year.
Of the companies that have been hit harder by interest rates this year and sought financing, close to half (45%) didn’t receive as much funding as they wanted, compared to a third (33%) of owners who sought financing but haven’t felt extra strain from interest rates this year. Many firms likely scaled back their planned investments due to the higher cost of borrowing.
Price changes continue to challenge small businesses
Increased prices are still a challenge for many businesses, with close to half of owners saying elevated prices have hurt them more this year than last year. Around just 10% of small-business owners said price changes have helped their business more this year than last year.
Many entrepreneurs are pessimistic about the direction prices are headed. More than half of small-business owners expect price changes to hurt their business going forward.
Increased prices are hitting Personal Services and Goods-Producing firms hardest
Personal Services and Goods-Producing businesses have been hit the hardest by price changes this year, with a majority of owners in both groups saying elevated prices have hurt them more this year than last.
Meanwhile, Professional Services and Community Services firms have fared better, with a plurality of owners from both groups saying price changes have affected their business this year about as much as they did last year.
Business owners want change on taxes and health care costs
Many small-business owners are concerned with taxes. That’s unsurprising, given that small-business owners report spending more than 200 hours per year navigating government regulations and tax compliance. More than 60% of respondents said they wanted to see action from policymakers on tax rates, making them the number-one policy issue among small-business owners. Tax complexity ranked third.
Health care costs ranked second, with nearly two-thirds of respondents saying they want policymakers to address them. Given how much health care spending has risen in the U.S. in recent decades, it’s easy to imagine the strain rising costs have put on small businesses.
Nearly Two-Thirds of Small Businesses Offer Their Employees Benefits
Nearly two-thirds of small-business owners reported offering benefits to their employees. More than 90% of businesses with 10 or more employees offer benefits, compared to more than half of those with fewer than 10 employees.
Small-business owners said they offer benefits for two primary reasons: It’s personally important to them (nearly 75% of respondents cited this reason), and they can afford to (nearly 40% cited this reason).
Paid time off (PTO) is the most popular benefit small businesses offer, with about half of all small businesses providing it, followed by retirement plans and health insurance.
PTO also tends to be the first benefit small businesses offer. Other benefits, like health insurance and retirement plans, are often more expensive, or more complicated to set up.
Some benefits, like health insurance, are much more common at businesses with at least 10 employees.
Health insurance can be particularly hard for the smallest firms to provide, since employers often get better rates if they have more employees.
Conclusion
Many small-business owners feel their company is headed in the right direction, but life as an entrepreneur isn’t easy.
Between the elevated cost of borrowing, a complicated tax code, and the challenges of hiring as a small firm, there’s plenty to keep entrepreneurs busy. But if the last few years are any indication, they’ll continue to adapt and thrive no matter the circumstances.
Methodology
Data presented here are from a survey of over 1,300 respondents conducted by Gusto between August 6 and August 31, 2024. Survey participants were recruited from the universe of Gusto customers who have owned their business since at least July 31, 2023. Survey results were weighted using the national distribution of 2-digit NAICS sector and firm age from the 2022 Annual Business Survey.
Citations
All U.S. demographic information, unless otherwise noted, sourced from 2023 American Community Survey data available here: https://www.census.gov/quickfacts/fact/table/US/PST045221.
- Share of U.S. population identifying as third gender or non-binary is from a University of California Los Angeles Williams’ Institute Report available at: https://williamsinstitute.law.ucla.edu/publications/nonbinary-lgbtq-adults-us/
- Share of U.S. population identifying as LGBTQ is from a Gallup report available at: https://news.gallup.com/poll/611864/lgbtq-identification.aspx
- Share of U.S. population that are immigrants or children of immigrants is from a Pew report available at: https://www.pewresearch.org/race-and-ethnicity/2020/08/20/facts-on-u-s-immigrants/
- Share of U.S. population that have a disability or chronic condition is from a Centers for Disease Control and Prevention report available at: https://www.cdc.gov/ncbddd/disabilityandhealth/infographic-disability-impacts-all.html
