2026 Small Business Employer Firms Report: What the Federal Reserve Survey Means for Owners
Quick answer:** The Federal Reserve Banks’ 2026 report on employer firms depicts a small-business economy that is operating, adapting, and investing—but with less confidence about the next year. Revenue and employment results were broadly stable in the 2025 survey, while expectations for both measures fell to their lowest point since the 2020 survey. Owners reported pressure from operating costs, tariffs, customer acquisition, staffing, and financing. At the same time, nearly half reported some use of artificial intelligence, primarily for writing, marketing, productivity, and planning.
This article explains the report in plain English, separates its findings from practical interpretation, and outlines a disciplined response for business owners, lenders, advisors, and local economic-development teams. It is an original analysis, not a reproduction of the Federal Reserve publication.
Primary source and data attribution: All survey figures in this article are attributed to the Federal Reserve Banks’ 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey. The survey was conducted from September 3 through November 14, 2025, and included 6,525 responses from a nationwide convenience sample of firms with 1–499 employees. See the full Federal Reserve report and its PDF edition.
What is the 2026 Report on Employer Firms?
The 2026 Report on Employer Firms is a national research publication from the Federal Reserve Banks’ Small Business Credit Survey (SBCS). It examines businesses that have employees and fewer than 500 workers. The report focuses on business performance, challenges, borrowing, customer and trade exposure, and a special set of questions about AI use.
The report is important because it moves beyond a single headline number. Instead of asking only whether small businesses feel optimistic, it looks at where owners are encountering pressure: whether they are making sales, paying more for inputs, seeking working capital, receiving the funding they request, or experimenting with new tools. That combination makes it particularly useful for people making day-to-day decisions.
One methodological point deserves emphasis. The SBCS uses a convenience sample, not a random sample. The Federal Reserve weights responses to improve representation, but the results should be treated as well-supported directional evidence rather than an exact census of every U.S. employer firm. That caveat does not make the findings unhelpful; it means readers should avoid projecting any one percentage onto every industry, city, or company.
The timing also matters. Much of the survey asks about the 12 months before the fielding period, roughly late 2024 through late 2025. When it asks about expectations, it is measuring views formed during September through November 2025 about the year ahead. It is a snapshot of business conditions and expectations at that point in time, not a forecast guaranteed to occur.
The central takeaway: stable operations, softer expectations
The most useful way to read the report is to distinguish present conditions from forward-looking sentiment. The survey found that revenue and employment growth were generally steady compared with the prior year. Yet businesses became more cautious about what comes next. The Federal Reserve’s revenue-expectations index declined from 39 to 33, while its employment-expectations index moved from 26 to 23. Both were the lowest readings since the 2020 survey.
Those indices are diffusion measures: they compare the share of firms expecting an increase with the share expecting a decrease. They do not mean that 33% of businesses expect revenue growth. The distinction is useful because it prevents an easy but inaccurate reading of the data.
For an owner, the message is not “stop investing.” It is “make investments that can work under several reasonable demand scenarios.” When current results hold up but expectations fade, cash conversion, customer retention, pricing discipline, and financing terms become more important than a broad expansion narrative. A business can still hire, launch, or add capacity—but the decision should be tied to evidence such as recurring demand, signed contracts, contribution margin, and a realistic working-capital plan.
Sales growth and customer reach are still the front-line challenge
The report identifies reaching customers and growing sales as the most commonly cited operational challenge. Hiring or retaining qualified staff followed. That order is telling. In many businesses, labor shortages are still real, but demand generation and sales execution are the immediate constraint.
This should change the question owners ask themselves. Instead of simply asking, “How do we get more leads?” a more useful set of questions is:
- Which customer segment produces the strongest gross margin and repeat business?
- Where does the sales process lose qualified prospects?
- Are price objections actually price objections, or is the value proposition unclear?
- Which existing customers have a credible need for another service, product, location, or contract term?
- Can the company describe its offer clearly enough for a person—and an AI search or answer engine—to understand who it helps and why it is different?
This last question has become more practical with AI-mediated discovery. A clear website structure, descriptive service pages, accurate location information, transparent pricing ranges where appropriate, documented expertise, and customer-focused answers can help prospective buyers find and assess a company. None of those measures replaces sales work. They make the sales work easier by reducing confusion before a conversation begins.
For local service firms, customer acquisition may benefit more from a focused city-and-service page, a current business profile, proof of results, and fast follow-up than from generic content volume. For business-to-business firms, the equivalent may be a concise industry page, a clearly stated implementation process, case evidence that protects client confidentiality, and helpful answers to procurement questions. The goal is not to write for a machine alone. The goal is to make the business legible to customers and the systems they use to research options.
Costs, tariffs, and the difficult work of protecting margin
Rising costs of goods, services, and wages were the most common financial challenge reported in the previous 12 months. More than four in ten firms also reported tariff-related cost increases as a financial challenge. Taken together, 77% of firms reported either rising costs generally, tariff-related cost pressure, or both. Retail and manufacturing stood out: 69% of retail firms and 62% of manufacturing firms reported tariff-related cost challenges.
The report’s trade findings illustrate why a simple “pass the cost through” instruction is inadequate. Forty-eight percent of firms said they sourced at least some inputs from outside the United States in 2024, and 14% said more than half of their inputs came from outside the country. Among firms with foreign inputs that faced price increases, 76% reported passing at least some costs to customers, and 60% reported absorbing at least some costs. In practice, many firms did both.
That combination is a rational response. Passing through every increase can reduce demand or strain customer relationships. Absorbing every increase can erase margin and weaken the ability to invest. A thoughtful approach may include several smaller actions instead:
- Map the cost increase to specific products, contracts, or customer segments instead of applying one blanket adjustment.
- Review minimum order quantities, delivery terms, waste, substitutions, and purchasing cadence before assuming a list-price change is the only lever.
- Build price-review language into new contracts where legally and commercially appropriate.
- Explain changes plainly to customers, with advance notice and a clear effective date.
- Measure unit economics after the change. Revenue can rise while gross profit dollars or customer retention deteriorate.
The Federal Reserve data also pushes back on the assumption that supply chains can be quickly redesigned. Only 13% of affected firms reported changing to domestic suppliers, 8% changed to different foreign suppliers, and 3% relocated production to the United States. Those low shares do not prove that supplier diversification is a poor idea. They do show that switching suppliers or moving production can be expensive, slow, and operationally difficult. Owners should treat it as a strategic project with quality, lead-time, cash-flow, and contract implications—not merely a sourcing checkbox.
International sales: exposure can be small, but volatility can matter
About one in five firms reported sales to international customers in 2024. For most of those companies, international customers represented less than 10% of total sales. Respondents were considerably more likely to expect a decline in annual international-customer sales than an increase when comparing expected 2025 sales with 2024: 40% versus 16%.
For a company with modest international revenue, that may not alter the entire business plan. But it can still matter if those sales absorb excess capacity, support a high-margin product line, or underpin a key supplier relationship. A useful operating practice is to identify international exposure in three places: customer demand, purchased inputs, and payment or currency risk. Even businesses that do not consider themselves exporters may have indirect exposure through suppliers and customers.
The sensible response is not to abandon international sales based on one survey. It is to improve visibility. Track international revenue separately, know the terms that determine when payment is received, document shipping and compliance responsibilities, and avoid treating a small foreign revenue stream as automatically reliable or automatically expendable.
Financing in 2026: availability is only one part of the decision
The report shows that financing remains part of normal business operations. Eighty-six percent of firms reported regularly using financing, with credit cards and loans among the most common products. Sixty percent applied for financing in the previous 12 months. The top stated reasons were meeting operating expenses (56%) and pursuing an expansion or new opportunity (46%).
Outcomes were mixed. Among applicants, 42% received all the financing they sought, 36% received some or most, and 22% received none. Separately, 38% of firms applied for a loan, line of credit, or merchant cash advance. This figure was nearly unchanged from the 2024 survey.
For owners, “was I approved?” is not a complete financing question. A better evaluation asks whether the amount, payment structure, fees, collateral requirements, personal guarantee, timing, and use of proceeds fit the business. The report notes that 31% of firms had no outstanding debt, up from 21% in the 2020 survey and back near prepandemic levels. Among firms with debt, 59% used a personal guarantee and 51% used business assets to secure it. Those figures are a reminder that business financing can materially affect the owner personally.
Before applying, prepare a short funding memo. It should state the amount requested, the specific use of funds, expected timing, how the investment or working capital will be repaid, the downside scenario, and the documents supporting the request. Typical supporting materials include current financial statements, bank statements, tax returns, an accounts-receivable aging, a debt schedule, and a practical forecast. The objective is not presentation polish for its own sake. It is to make the decision legible to both the owner and the lender.
Bank, online lender, or credit union? Compare the total offer
Among applicants for loans, lines of credit, or cash advances, large banks were the most common source, followed by online lenders and small banks. Online fintech lender use increased from 17% of applicants in the 2020 survey to 29% in the 2025 survey. The appeal is understandable: digital lenders can be visible, convenient, and fast.
The report also presents a reason to slow down and compare offers carefully. Applicants who sought funding at small banks were more likely to be fully approved (57%) than applicants at other lender types. And among businesses that borrowed from online lenders, 60% reported that actual borrowing costs were higher than expected. The comparable shares at small and large banks were 37% and 32%.
This does not mean all online financing is unsuitable or all bank products are better. It means speed of application should not be confused with clarity or affordability. Owners should compare the full cost and operational burden of a financing offer, including interest, fees, repayment frequency, collateral, prepayment provisions, personal guarantee exposure, required deposits, and whether the payment schedule matches cash inflows.
A simple review table can prevent costly surprises:
| Question | Why it matters |
|---|---|
| What is the total dollar cost if the balance is paid as scheduled? | A stated rate may not capture fees or the complete repayment obligation. |
| How often is repayment collected? | Daily or weekly collection can pressure working capital even when monthly revenue looks adequate. |
| What secures the obligation? | Business assets and personal guarantees can create different forms of exposure. |
| What happens if sales weaken? | A viable payment in a strong month may be unsafe in a normal or weak month. |
| Can the business prepay, refinance, or change terms? | Flexibility has value when conditions change. |
Because the right choice depends on the firm’s facts, owners should review material financing documents with qualified financial and legal advisors. This article is educational information, not individualized financial, tax, or legal advice.
AI adoption is real, but full integration is uncommon
One of the clearest findings in the report is that AI has reached everyday small-business work. Forty-six percent of firms said their business or employees currently use AI. Another 15% planned to begin using it in the next 12 months. One-third had no plans to use AI.
The maturity of adoption is more revealing than the headline adoption number. About half of AI users said they were experimenting. Forty-four percent said they had partially integrated AI into business processes. Only 7% said their use was fully integrated. The common uses were writing or marketing (83% of AI users), individual productivity (61%), and planning or analysis (51%).
These results describe AI as a working tool rather than a finished transformation. Most firms appear to be starting with tasks that are easy to test and easy to reverse: drafting, summarizing, organizing, brainstorming, research preparation, or repetitive administrative work. That is generally a sound sequence.
The reported outcomes are also more nuanced than claims that AI either immediately eliminates jobs or delivers no value. Most AI users saw no change in labor costs. Still, 71% reported improved productivity, 39% reported better quality of goods or services, and 31% reported higher sales. These are self-reported associations, not proof that AI alone caused each result. But they suggest that the early value often comes through better throughput, faster preparation, more consistent service, or more time for higher-value work.
A responsible small-business AI plan
The report identifies accuracy (46%) and adapting tools to business needs (43%) as leading challenges for current AI users. Businesses planning adoption most often cited finding tools that fit their needs (54%) and the time required to implement tools or train staff (37%). Those concerns should shape the rollout.
Start with a narrow, measurable use case. A marketing team might test whether AI-assisted first drafts reduce production time while preserving brand review. An operations team might test whether a structured assistant helps turn meeting notes into action lists. A customer-service leader might test whether it helps classify incoming messages without sending automated answers. The test should have an owner, a baseline, a quality check, a defined set of allowed data, and a date to assess results.
Avoid uploading confidential client data, employee information, passwords, regulated information, or proprietary documents into tools unless the business has verified the provider’s privacy, security, retention, and contractual terms. Require human review for customer-facing, financial, legal, medical, safety, employment, or otherwise consequential content. An AI system can produce fluent text that is wrong, incomplete, dated, or inappropriate for the company’s context.
The strongest small-business AI strategy is not “use AI everywhere.” It is “use it where the work is repetitive, the benefit can be measured, human accountability remains clear, and the data rules are understood.” That approach aligns with the survey’s finding that many businesses are still experimenting or partially integrating rather than treating AI as a fully autonomous system.
A 90-day operating response to the report’s findings
The report’s themes can feel broad. A short operating cadence makes them actionable. Over the next 90 days, an employer firm could focus on four connected workstreams.
First 30 days: establish visibility. Refresh a 13-week cash forecast, calculate gross margin by product or service line, list the top customer-concentration risks, map critical foreign-input exposure, and build a simple debt calendar. Review where sales opportunities are entering the funnel and where they are stalling. Select one AI use case that is low risk and easy to assess.
Days 31–60: make targeted changes. Reprice or renegotiate the areas where costs and margin evidence justify it. Contact high-value existing customers with a specific retention or expansion plan. Prepare financing materials before financing becomes urgent. Compare at least two viable funding paths if capital is needed. Train a small group of employees on the approved AI workflow and document the human-review step.
Days 61–90: evaluate and institutionalize. Compare results with the baseline: cash conversion, gross margin, proposal-to-close rate, customer retention, output quality, and staff time. Decide whether to expand, revise, or stop the AI test. Update the cash forecast and operating plan based on actual outcomes rather than optimism or anxiety. Keep the changes that improve resilience and unwind experiments that do not produce a clear benefit.
This framework will not eliminate uncertainty. It makes uncertainty manageable by turning it into specific operating questions. The report’s broader lesson is that small firms are responding to pressure with a mix of caution and adaptation. The companies best positioned for that environment will understand their numbers, keep customer relevance at the center, read financing terms carefully, and adopt technology with judgment.
Frequently asked questions
What does the 2026 Federal Reserve employer-firms report say?
It says small employer firms reported relatively stable revenue and employment results, but their expectations for the coming year weakened. Major reported challenges included reaching customers, hiring and retention, rising costs, tariff-related cost pressure, and financing. The report also found that 46% of firms or their employees were using AI.
How many small businesses are using AI according to the report?
Forty-six percent of surveyed employer firms said they or their employees currently use AI. An additional 15% planned to begin using it in the next 12 months. The findings reflect the 2025 Small Business Credit Survey sample, not a complete count of all U.S. businesses.
What are the most common uses of AI for employer firms?
Among firms using AI, the most common reported uses were writing or marketing, individual productivity, and planning or analysis. Most users were experimenting or had only partially integrated AI into their processes.
Did small businesses have trouble getting financing?
Financing outcomes varied. In the survey, 42% of financing applicants received the full amount requested, 36% received some or most, and 22% received none. The right lesson is to assess both access and terms, including total cost, repayment timing, fees, collateral, and personal guarantees.
Are these results representative of every employer firm in the United States?
No single survey result describes every business. The Federal Reserve notes that the SBCS is a nationwide convenience sample rather than a random sample, and it should be interpreted with awareness of potential sample bias. It remains a valuable source of timely evidence about the experiences of surveyed employer firms.
Source, methodology, and editorial note
Government data source: Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey, published March 3, 2026. The survey received 6,525 responses from employer firms with 1–499 full- or part-time employees in all 50 states and the District of Columbia. The Federal Reserve states that the SBCS is an annual survey and that the results are weighted but derived from a convenience sample. Access the report landing page, full report PDF, and survey methodology.
Editorial note: This post was written as an original explanatory analysis. Percentages and survey descriptions are attributed to the Federal Reserve source above; interpretations and operating suggestions are editorial guidance. This content is intended for educational purposes and does not replace advice from a qualified legal, tax, financial, cybersecurity, or industry professional.
