More small businesses were profitable last year than in 2021, according to the Federal Reserve’s annual Credit Survey of nearly 8,000 small businesses.
The share of firms operating at a profit increased to 45 percent from 35 percent in 2021, according to the report. Seventeen percent of respondents said their firms are in “very good” or “excellent” financial condition, up one percentage point from the previous year. However, the net share of firms expecting revenue growth in the next 12 months fell to 35 percent in 2022, and remains far below pre-pandemic levels.
Business expenses proved to be a pressing concern as decades-high inflation readings continued. Four in five firms reported challenges related to rising costs, and nearly half had trouble paying operating expenses or handling uneven cash flows. A growing share of firms sought traditional financing through loans, lines of credit or merchant cash advances as pandemic-related funding programs ended.
The net share of firms expecting growth in employment fell to 27 percent last year from 31 percent in 2021 as the labor market remained tight. Sixty percent reported challenges in hiring or retaining qualified staff, with an equal share experiencing supply chain issues.
“In response to hiring challenges, firms were more likely in 2022 than in 2021 to make changes to employee compensation — for example, raising wages or enhancing non-wage compensation — and less likely to reduce business operations or add to their employees’ workload,” the Fed said.
Other findings included:
- Loan applicants were most likely to receive at least partial approval at small banks (82 percent), followed by finance companies and online lenders (76 percent and 71 percent, respectively).
- Two-thirds of small businesses used the owner’s personal savings or relied on funding from friends or family in the past five years, while 55 percent used government funding. Fifty-one percent were funded through a financial institution or lender.
- Forty percent applied for a traditional loan, line of credit or merchant cash advance, an increase from 25 percent in 2021, as firms tried to meet operating expenses and fund expansion.