The State of Small Business 2025: Resilience Despite Rising Costs and Economic Uncertainty

Key Findings

• Entrepreneurs are pessimistic about the economy, but happy with their businesses. While half of small business owners have a negative view of the U.S. economy, 87% say their business is meeting or exceeding expectations.

• Tariffs are top of mind for small business owners. Half of small businesses have been hit harder by tariffs this year than in 2024. Among small business owners who are pessimistic about the U.S. economy, 85% said tariffs have contributed to that sentiment.

• Cost pressures are rising for nearly 60% of small businesses. Fifty-nine percent of small business owners say price changes have hurt them more this year than last year. On top of the impact of tariffs, inflation remains a concern for many small business owners.

• 4 out of 10 small businesses haven’t hired this year. Entrepreneurs appear to be offsetting higher input prices by keeping labor costs under control. That’s especially true for employer firms with fewer than 10 employees — just 31% have hired this year. This is a reflection of the broader U.S. slowdown in hiring we’ve seen in 2025.

• Hiring continues to shift toward jobs where humans have an edge over AI. 70% of small business hires this year are in client- or customer-facing roles, up from 49% before 2020. Meanwhile, small businesses that hired in 2025 were much less likely to hire for administrative roles than those whose most recent hire was in 2023 or earlier.

• 59% of small businesses are using external financing. This highlights the impact of today’s continued high interest rates on America’s small business owners. Business credit cards are the most popular form of financing, followed by personal contributions and private business loans.

• Small businesses are often using outside financing for expenses, not growth. Small businesses in 2025 are primarily using financing to cover short-term expenses or payrolls when cash is tight – rather than investing those borrowed funds in long-term growth.

Introduction

It’s no exaggeration to say that we’re living through a national renaissance in entrepreneurship. An eye-popping 5.3 million new companies launched in the last 12 months – a pace that’s double pre-pandemic levels and translates into millions more Americans embarking on a journey of financial independence, creating new jobs, and transforming their local communities for the better. The evidence is clear today that this post-pandemic boom in entrepreneurship isn’t just hobbies and side hustles.

However, there are two big risks facing small businesses in 2025. The first is tariffs. What began in 2025 as uncertainty is now manifesting at the end of the year as real economic costs. Tariffs raise the prices of imported goods, and these higher prices then filter throughout the economy. As our survey results below make clear, the costs of tariffs are felt by many small business owners, who told us that tariffs are creating a clear drag on margins and forcing them to rethink supply chains and possibly scale back expansion plans.

The second risk facing small business in 2025 is the cost of credit. Whether used to grow their businesses or meet cash flow challenges, loans are the lifeblood of many small businesses, and borrowing costs remain elevated compared to the past decade. In our survey, we heard from owners who say they’re facing high interest rates, have lower business optimism, and may be delaying growth to maintain cash flow in today’s environment. 

But despite these headwinds, the overall outlook in our State of Small Business 2025 report is notably brighter than last year. On balance, owners’ views on their business performance ticked up this year – although roughly 40% of small businesses with at least one employee say they haven’t hired at all in 2025. And small businesses have proven resilient in their ability to provide meaningful benefits to their employees, with the share of companies offering health insurance, paid time off, and retirement savings largely unchanged from last year – evidence that small business owners are still investing in their employees even as they watch costs.

This year’s State of Small Business report brings these themes together. Drawing on responses from a nationally representative survey of 1,148 small businesses, we reveal what America’s small business owners think about the state of the economy, their views on tariffs and interest rates, and their expectations for hiring and business performance in the coming year.

Small Businesses Are Resilient in the Face of Economic Uncertainty

Small businesses are performing better than owners’ expectations

The economy has presented a variety of challenges to small business owners over the past five years, from elevated inflation and labor costs in 2021 and 2022, to tariffs this year.

While these headwinds have fueled persistent recession concerns, they haven’t knocked small businesses off course. The vast majority of respondents (87%) said their business is meeting or exceeding their expectations compared to when they started it, with just over half (51%) saying their business has performed better than they expected.

This is a directional improvement from last year, with the share of business owners saying their business is performing worse than they expected down from 18% to 14%, and the share saying it’s performing better up from 47% to 51%. Although this trend does not reach the level of statistical significance, it’s still a welcome sign that small business health is trending in the right direction compared to a year ago. 

Pessimism about the overall economy remains

While small business owners view their companies as performing better this year, overall we still found that 50% have pessimistic views of the U.S. economy (16% “extremely” and 34% “somewhat” pessimistic). Despite these negative views of the nation’s overall economy, many expect that their business will continue performing above expectations. Sixty-one percent of respondents said they’re optimistic about their business. Although small business owners expect more economic challenges ahead, they trust in their ability to handle them.

Tariffs are a top concern for small business owners

Tariffs have been a top concern for business owners this year. The United States’ average effective tariff rate of 18.6% is the highest since 1933, leaving many entrepreneurs with elevated input costs. The tariffs introduced this year appear to have impacted around half of small businesses, as 50% of the small business owners we surveyed said tariffs have had a more negative impact on their business than last year. This comes as little surprise, as it’s well known that tariffs – which have the same impact as a tax on business inputs – are impacting America’s small businesses through increasing input costs and increasing economic uncertainty due to the back-and-forth of tariff policy over the past year.

Interestingly, we find that business owners whose firms are performing worse than expected are especially likely to have tariff concerns, with 65% saying tariffs have had a negative impact on their business.

Tariffs are also fueling negative sentiments about the economy as a whole. Eighty-five percent of small business owners who have a negative view of the U.S. economy said tariffs contributed to that sentiment.

Among sectors, firms that produce or resell physical goods have taken the biggest hit from tariffs. More than 60% of goods-producing (65%) and personal services firms (70%) — which include retail shops and restaurants — said tariffs have had a more negative impact this year than last year.

High interest rates remain painful for small business

Business loans are the lifeblood of many small businesses. That means interest rates have an outsized impact on small companies. Our survey found that the cost of business credit continues to be a challenge for small businesses in 2025. Across all of the industries we surveyed, around a third of small business owners said high interest rates are having a more negative effect in 2025 compared to last year. By contrast, only 2.8% of small businesses said interest rates are having a more positive impact on their businesses this year. 

Price changes are impacting small businesses more this year 

Prices are also a major concern for small businesses, likely driven by elevated tariffs  and an inflation rate that remains above pre-pandemic levels (inflation was 2.9% as of August 2025). Fifty-nine percent of respondents in this year’s survey said price changes have had a more negative impact on their business this year than last year, compared to 48% in our 2024 survey. By contrast, only 5% said price changes are having a more positive impact this year. 

Among sectors, personal-services firms have felt the impact of price changes most, with 75% saying price changes have had a more negative impact this year than last year, and only 5% saying they’ve had a more positive impact. Small businesses in this category tend to have slim profit margins, which makes them especially sensitive to price increases.

Small Businesses Are Changing How They Hire

Nearly 40% of small businesses haven’t hired this year

Official data on the economy show that the nation’s labor market has cooled in 2025, with slower hiring overall. Similar to many large firms, small businesses have also been cautious about hiring this year. Around 40% of small businesses with at least one employee (aside from the owner) say they have not hired at all this year.

This year, most U.S. hiring has been concentrated in health care and high-turnover industries like restaurants and hospitality. In our survey, more than 65% of personal services and community services firms with at least one employee have hired this year, compared to fewer than 60% of goods-producing and professional services firms – trends that largely mirror what we’re seeing in the overall economy today.

We find that the fewer employees a small business has, the less likely it has been to hire this year. Just 31% of businesses with between one and nine employees have hired in 2025, compared to 82% of small businesses with at least 10 employees.

The smallest businesses tend to keep their headcount steady over time and hire only when an employee leaves. The low rate of hiring among those firms suggests more workers are staying put, which is consistent with broader trends in the labor market. For example, BLS data show that in August 2025 the share of American workers voluntarily quitting their jobs hit the lowest rate since the pandemic.

Hiring continues to shift toward jobs where humans have an edge over AI

Over the past five years, small business owners have increasingly focused their hiring on roles that involve frequent interaction with clients or customers. This could be for multiple reasons. As small businesses have begun to use AI more, they might have increased efficiency around administrative tasks. Additionally, as price increases have stressed the budgets of both businesses and consumers, small businesses who can’t easily raise prices may be investing in exceptional customer service to retain and attract customers. Finally, customer- and client-facing roles may be more resilient to replacement by today’s AI tools, as most of their value comes from a “human touch” AI can’t replicate.

Increased hiring for customer service roles wasn’t concentrated only in hospitality or personal services industries where turnover is highest. Nearly 75% of small businesses in the professional services sector and more than half in the goods-producing sector hired for customer service roles this year. All sectors report an increase in hiring for customer service roles compared to before 2020.

Financing Is Critical for Small Businesses

Most small businesses are using external financing

As noted above, today’s continued high interest rates remain a key concern for small businesses. Even as the cost of credit remains high, external financing, including contributing their own personal funds to their business, continues to be an important tool for small business owners. Fifty-nine percent of small businesses have used external financing this year, with firms across all sectors using financing at similar rates. Personal services firms have been the most likely (68%) to use financing, while professional services firms (54%) have been least likely.

The fact that 59% of American small businesses have relied on some form of external financing in 2025 illustrates how sensitive this sector of our nation’s economy is to interest rates. 

Business credit cards and personal financing are most popular 

Among the different financing types used by small businesses, business credit cards have been the most popular source of external financing this year, with 69% percent of small businesses who have used any funding using one. Personally financing the business is the second most common form of external financing, with 40% of small business owners supporting their business with personal funds. Private business loans have been less popular, with just 24% of firms relying on them.

Business credit cards and personal financing provide small business owners with flexible access to short-term liquidity. Personal loans to a business can be costless – other than the potential opportunity cost of missing out on investing those dollars elsewhere – and credit card interest payments can often be deferred through flexible payment options or completely avoided through paying off card balances in full each month – a common strategy among small businesses who use financing to cover short-term payroll and other expenses. This suggests that small business owners today are highly reliant on flexible short-term credit to manage their cash flows. 

Personal financing is most common among business owners with household incomes of less than $150K

Personal financing is more common among business owners with relatively lower incomes. 

Forty-eight percent of small business owners who have used external financing this year and  earn less than $150,000 in household income — which was roughly the median among the business owners — are using personal financing like savings or personal credit cards to fund their business. That compares with 36% of owners who have used external financing and have  household incomes above $150,000. Savings and credit cards are the most popular types of personal financing overall.

The likely explanation for this gap is that small business owners with relatively lower incomes are more likely to run newer businesses with lower revenues, making it harder to qualify for business loans or credit cards.

Small businesses use external financing to smooth out cash flows

It’s a popular assumption that small businesses primarily seek financing to grow their business. However, our survey shows financing is more often used to cover everyday expenses. This year, entrepreneurs have been most likely to use external financing to cover short-term costs or buy equipment and tools. Just 16% of small businesses that have received external financing this year have used it to invest in long-term growth.

This focus on short-term expenses over long-term investments doesn’t necessarily mean small businesses today are struggling. Often, even for strong businesses, their bills come due before their recent invoices have been paid, which makes financing an important tool to smooth out cash flows.

Most small businesses continue offering employee benefits

In 2025, economic and labor-market conditions have had little impact on the benefits that small business owners offer their employees. As in 2024, more than half of small businesses are offering health insurance and retirement savings this year, and around three-fourths offer paid time off.

Instead of reacting to the recent overall slowdown in the U.S. labor market or the performance of their business, small business owners tend to offer benefits because they feel it’s personally important to do so – a reflection of their own culture and values as small business owners. Nearly 70% of small business owners who offer benefits cited a belief that offering benefits is important as their primary motivator, compared to 38% who are offering benefits because their business has grown, and 18% who want to remain a competitive employer.

Conclusion

Despite widespread pessimism about the economy among small-business owners, our 2025 State of Small Business survey shows that America’s small businesses continue to power the U.S. economy.

Although tariffs and inflation have heightened cost pressures, small business owners have found ways to adjust this year, keeping labor costs under control, continuing to offer key employee benefits, and using external financing to smooth out cash flows. 

The overall state of small businesses today is best characterized as resilience in the face of economic uncertainty – an encouraging trend we expect to carry forward in 2026 and beyond.  

Methodology

Data presented here are from a survey of 1,148 small-business respondents conducted by Gusto between August 13 and September 8, 2025. The margin of error is +/- 4.3 percentage points. Survey participants were recruited from the universe of Gusto customers who have owned their businesses since at least July 31, 2024. Survey results were weighted to be nationally representative using the national distribution of 2-digit NAICS sectors and firm ages from the Census Bureau’s 2023 Annual Business Survey.

To ensure adequate sample sizes for analysis, we grouped detailed two-digit NAICS industries into four broader Gusto sectors. This aggregation balances the need for meaningful industry distinctions with the statistical reliability required for accurate reporting, especially in smaller states and firm-size strata.

The four composite sectors are:

• Goods-Producing, which includes construction, manufacturing, utilities, wholesale trade, transportation, and resource-extraction industries.

• Professional Services, covering most office-based industries such as professional, scientific, and technical services, finance, real estate, information, and administrative support.

• Personal Services, encompassing consumer-facing industries like retail, accommodation and food services, arts and recreation, and agriculture.

• Community Services, which includes health care, education, and public administration.