Small business optimism is high, but significant challenges lie ahead

Small business optimism is at a six-year high, according to a new report from the National Federation of Independent Businesses (NFIB).

The post-election economic outlook has created this “optimism on Main Street,” said Bill Dunkelberg, NFIB’s chief economist and a dean at Temple University’s Fox School of Business.

“Small business owners feel more certain and hopeful about the economic agenda of the new administration,” Dunkelberg said. “Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.”

The monthly NFIB report dovetails with recent surveys by Intuit, the U.S. Chamber of Commerce, Thryv, ZipRecruiter, and American Express. They all say business owners are more optimistic about revenue and increased hiring in 2025. Many of my clients are equally bullish about next year.

Still, significant challenges lie ahead.

Core inflation is at 3.2%, higher than the Federal Reserve’s stated target of 2%.

Many businesses are still dealing with double-digit cost increases that accumulated over the past few years, and continue to do so.

According to the NFIB, 20% of business owners said last month that inflation — including higher input and labor costs — was the most important problem in operations. That’s “unchanged from November and leading labor quality as the top issue by one point,” the NFIB report said.

Meanwhile, according to the Paychex Small Business Employment Watch, workers’ average hourly earnings growth has been less than 3% for the past five months. As inflation outpaces wage growth, consumer spending may be impacted in 2025.

While the Fed has reduced interest rates twice in the past six months, the national prime interest rate — which banks use when lending to their most preferred customers — is at 7.5%, significantly higher than average rates businesses paid in the past.

Unfortunately, most small businesses are paying one to three points above that rate, depending on their credit histories. They could be facing rates as high as 10.5% on equipment, property, and working capital loans needed to grow their companies.

A five-year equipment loan of $1 million at a 9% interest rate would incur approximately $245,000 in total interest costs. If that same business owner received a similar loan in 2021, when interest rates were averaging 4.75% percent, the total interest paid would have been half that much.

President Donald Trump has promised to impose tariffs on goods imported from many countries, which could increase the costs of items purchased by small businesses.

Businesses can find ways around these higher costs, but significant risk remains for their margins, particularly for businesses that rely on foreign-made goods and cannot find better priced alternatives.

“The repercussions of these tariffs would be felt by every firm that sells imported goods and by every firm that uses imported inputs to run its business,” warned The Brookings Institute in November. “Prices will rise, production will be depressed, and employment will likely fall, particularly in sectors exposed to higher input prices or foreign retaliation.”

Trump plans to aggressively pursue making permanent many of the provisions of the 2017 Tax Cuts and Jobs Act. That could keep in place significant deductions for pass-through businesses, research and development costs, and capital expenditures, as well as lower tax rates on corporations. It could also maintain the current standard deduction for individuals.

But Trump will face opposition, and with only a five-seat lead in the House of Representatives, it’s not certain he will succeed.

As a Certified Public Accountant, I’m advising many of my clients to sit tight and keep a close eye on developments. I expect a resolution by midyear.

Unfortunately, tax planning is critical and this uncertainty may hold businesses back from making investments and hiring.

During the Biden Administration, rules around overtime, worker classifications, and business ownership raised costs and privacy concerns for many small businesses. Increased fines, regulations, and activity by the Occupational Safety and Health Organization, the Equal Employment Opportunity Commission and the National Labor Relations Board also posed compliance challenges.

But many of these rules are being contested in court and it’s likely that the Trump administration will not defend them. Many employment experts expect rules to be implemented at the state level over the new few years.

“State-level trends may drive changes in paid leave, minimum wage, and AI regulation,” said Daniel Johns, an attorney at Cozen O’Connor in Philadelphia. He advises employers “to stay informed about both federal and state-level legislative shifts.”

In an already tight labor market, many small businesses will soon face new challenges in hiring immigrant workers and increased reporting requirements.

Patrick Shen, an immigration attorney at the Fragomen law firm in Washington, D.C., told SHRM’s HR Quarterly that employers should take steps now “to ensure proactive compliance.” Shen expects “extreme vetting” to make a comeback, with “increased interview requirements and higher scrutiny of visa applications” becoming commonplace.

The Trump administration will likely be more pro-business than Biden. But that doesn’t businesses — particularly small businesses — won’t face tricky situations over the next few years.