The economic outlook in the U.S. is looking up with inflation decreasing, the Federal Reserve lowering interest rates, and the stock market hitting record highs almost every day.

However, many small businesses continue to face difficulties, grappling with financial pressures that are some of the worst they’ve experienced in years. This could pose a risk to a projected “soft landing” for the economy, which would avoid a recession, say loan advisors, trade organizations, and numerous economists.

Even with easing inflation and dropping rates, expenses such as labor remain high for small businesses. Experts indicate that interest rates need to fall significantly more to truly impact the cost of loans. Concurrently, sales are stagnating as customers decrease their discretionary spending after a post-pandemic surge, which is further squeezing profit margins for business owners.

The financial buffer that helped many small businesses weather economic storms in recent years has diminished. Most have exhausted the federal pandemic relief funds, and deferred loan payments are now coming due.

“It’s a perfect storm,” says Ami Kassar, CEO of MultiFunding, a small business loan advisory service. “Their costs are using up funds, demand is stagnant. Many are finding themselves on unstable footing. It’s almost as if we are experiencing another silent pandemic.”

Kassar estimates that around 20% of his small business clients are facing a critical cash flow issue, and some might ultimately close or file for bankruptcy.

Generally, the majority of small firms are financially stable despite slimmer profits, and many of those facing difficulties are likely to navigate through this tough period, according to economists.

“The pandemic has highlighted small business owners’ ingenuity, which has aided them in overcoming recent obstacles,” noted Shernette McLeod, an economist at TD Bank.

However, their financial struggles could trigger a recession if a considerable number of businesses close down or significantly increase layoffs to remain viable, experts warn.

“If small businesses begin to let workers go, it could impact medium-sized enterprises, leading to a domino effect,” stated Ryan Sweet, chief U.S. economist at Oxford Economics, while also noting that he doesn’t see this as a likely outcome. “They underpin the labor market.”

Small businesses with fewer than 500 employees account for nearly half of all U.S. jobs and are responsible for most job growth, according to the National Federation of Independent Business (NFIB) and the Small Business Administration (SBA). Companies with fewer than 100 employees contribute about a third of private-sector payrolls, as reported by the Census Bureau.

Recent months have witnessed a marked slowdown in U.S. job growth, primarily attributed to small businesses. Since April, companies with less than 50 employees have cut jobs while larger firms have been adding positions, according to ADP, a prominent payroll services company. Paychex also indicated that the recent job losses at small businesses they service mark the first instances of job cuts since March 2021.

Small businesses are reducing their operations as costs continue to rise. Due to COVID-related labor shortages, business owners have raised wages steeply to attract workers from larger firms that can afford to provide better salaries and benefits. Additionally, interest rates on SBA loans have surged to approximately 11% from 7% in 2022 as the Federal Reserve adjusted its key rates to control inflation. Meanwhile, rent saw an annual jump of 11% in July, which is double the increase in consumer rent, according to the Bank of America Institute, which studies consumer behavior and the economy.

Coventry Creations, which specializes in candles, oils, sprays, and other spiritual and occult items, experienced an 85% sales increase in 2021 as Americans spent their federal stimulus funds and savings accumulated during lockdown. Co-owner Jacki Smith noted that the Ferndale, Michigan-based business expanded its workforce by 13 employees to manage the demand surge.

However, sales have been on a downward trajectory since 2021, according to Smith, who operates the business alongside her sister, Patty Shaw. Revenue in 2023 fell 30% below pre-crisis levels, and the company has been incurring losses.

Some retailers carrying their products closed due to the rise of remote work, which led to fewer office employees making visits during lunchtime or commuting. For the shops that remain, revenue has plummeted as consumers, pressed by inflation and reduced savings, shift their spending priorities toward essential items, reducing discretionary expenditures.

In the wake of the pandemic, Smith has had to raise her employees’ starting pay from about $10.50 to $16.50 per hour. Supply costs have surged nearly 30%. Furthermore, the interest rate on her operating line of credit increased from 7% to 11%.

She and her husband have cut back on dining out, entertainment, and vacations, opting instead to buy groceries only when they have funds. “We wait until payday,” she commented.

Currently, the business carries $700,000 in debt and is falling behind on payments owed to suppliers and other creditors.

“On most days, I find myself questioning whether I want to continue doing this,” she expressed. “I’m always on the lookout to ensure I don’t slip.” At times, she confessed, “I wake up feeling anxious.” However, she is focused on improving marketing strategies for Coventry Creations’ online sales and is working on adapting some of their products for more mainstream retail outlets, like gift shops.

“I am committed to ensuring this business stays afloat,” she declared, despite entertaining thoughts of bankruptcy. Her workforce has been reduced to 17 employees, and some have seen their hours cut.

Other small businesses are grappling with soaring costs for insurance and rent.

A survey by Alignable in July revealed that 41% of small business owners struggled to pay their rent fully and on time.

Simultaneously, sales have been declining as many Americans are cutting back on their spending. In July and August, the difference between small firms reporting decreased versus increased sales over the past three months reached its second highest point since 2020, according to the NFIB’s monthly survey in August.

In contrast to smaller businesses, larger companies face similar challenges but have more varied income sources and greater financial reserves, according to David Tinsley, an economist at the Bank of America Institute.

Large corporations also have more flexibility in transferring increased costs to consumers, as they typically have larger market shares and can balance higher prices on some items with lower prices on others, explained Anthony Rose, the CFO of Kapitus, a funding provider for small enterprises.

The increasing expenses and dwindling income are severely impacting entrepreneurs’ profits.

A July survey by Alignable found that 51% of small business owners reported earning half or less than they did a year prior, marking a 9 percentage point rise since March. Meanwhile, 72% indicated they are earning less than pre-pandemic levels, the highest proportion recorded this year.

Bank of America’s findings indicate that while small business savings account inflows still exceed outflows, net gains have fallen below pre-pandemic figures.

For several years, many small businesses depended on leftover funds from the federal Paycheck Protection Program, designed to cover payroll during the initial pandemic phase, to manage their expenses. “That’s finished,” Kassar remarked.

Although the federal government has postponed repayments for other emergency assistance, business owners began repaying those loans last year, adding another financial burden, Kassar noted.

Envision Tee, a custom T-shirt printing company based in Dubuque, Iowa, had to start repaying a $500,000 emergency loan last year, which has increased its monthly expenses by roughly $2,000, according to CEO Tom Rauen.

Though that amount isn’t overly burdensome, Rauen pointed out that it comes alongside a 50% rise in blank shirt costs and a 25% increase in wages over recent years. The company has only been able to raise its prices for clients, including businesses and sports teams, by 10%, which is squeezing its profit margins.

After remaining stable for a few years, revenue has slightly decreased this year, partially due to uncertainties surrounding tax and policy changes leading up to the upcoming election, Rauen added. His clients, also feeling the strain from higher rents and taxes, have been paying late, further exacerbating his financial challenges.

“We are often the last ones to get paid,” he stated.

While Federal interest rate reductions may offer some relief by lowering borrowing costs, the benefits won’t be immediate.

“It will take time for rates to decline enough to make a significant impact,” stated Lionel Felix, CEO of Felix Media Solutions in Austin, Texas, which sets up video conferencing systems in offices. He mentioned that interest rates on his credit line have surged from around 4% to nearly 11%, adding that his business revenue has stagnated.

Some small enterprises are finding themselves in a difficult situation.

In July, the percentage of small businesses that were 31 to 89 days late on their loan payments increased to 1.8%, up from 1.2% in early 2022, slightly above pre-COVID levels, according to reports from TD Bank and Equifax. The rate of serious delinquencies (90 days or longer) stood at 0.7%, also a bit higher than figures from 2019.

“Some small businesses are at their limits” and may face closure, warned Holly Wade, the head of the NFIB Research Center.

Others assert that the fate of many businesses rests on the spending behavior of consumers. “If consumer demand remains stable, small businesses might manage to get by,” said Rohit Aurora, CEO of Biz2Credit, which assists small firms in securing loans. “However, if demand declines sharply, we could see a significant rise in bankruptcies.”