Small-business owners face a punishing cocktail of labor shortages, inflation and rising rates. But some are finding fresh ways to thrive.

New hires were much harder to come by. Everything, from a pound of chicken wings to the interest on his commercial loan, cost more. College students — now a group who graduated high school or started their undergraduate programs in the era of social distancing and pandemic pods — just didn’t go out as much. 

“It’s been the hardest three and a half years of my life,” said Carini, who’s worked in the restaurant industry for more than two decades. His business lost out on more than $1.3 million in potential revenue in 2020 and 2021, he estimated, a blow that left him financially drowning even after the bar started turning a profit again. 

Many of America’s small businesses have experienced an economic whiplash over the last four years. Small-business owners navigated the COVID-19 pandemic, only to reemerge into an economy that served up a new set of challenges: high prices, rising interest rates, and a shortage of workers that rapidly reshaped the job market.

At Linda’s, the future was so uncertain that Carini had to take drastic measures. Faced with growing debts, Carini launched a GoFundMe campaign in September, asking customers to donate to keep the restaurant afloat.

So far, he’s raised about $35,000, which he said will help the bar make it through the school year — and hopefully get on firmer financial footing. 

Challenges that haven’t eased up

Inflation has finally been easing in recent months, but many Americans say that didn’t bring immediate relief from the pinch of high prices. The median interest rates for new fixed-rate small-business term loans increased to 7.5% in the second quarter of 2023, up from 4.25% at the start of last year. 

Competition for labor is also tough for many businesses: the unemployment rate fell to a four-month low of 3.7% from 3.9%, and there was a sharp 0.4% increase in average hourly earnings, the largest gain in four months, the government said Friday. 

These headwinds can put more pressure on small businesses, which often have thinner profit margins and smaller cash reserves compared with large companies. 

“If you’re a smaller fish in a big pond… it’s going to be potentially much more difficult for you to keep up with these trends,” said Andrew Butters, an associate professor of business economics and public policy at the Indiana University Kelley School of Business.

Some small businesses are still struggling to get back to where they were before the pandemic. But others have found ways to adapt and, in some cases, thrive in that difficult landscape.  

“It’s day-by-day, week-by-week,” said Taylor Evans, president of Rust Belt Recruiting in Rocky River, Ohio. “At the end of the day, if you can be agile right now, you’re in the best place to survive.” 

Finding new ways to thrive 

Some small businesses have managed to weather the last four years — even flourish — during a time rife with economic challenges. 

At Francie & Finch Bookshop in Lincoln, Neb., owner Leslie Huerta used COVID-era shutdowns as a chance to focus on the bookstore’s online ordering options — a part of the business that is still going strong three years later, she said. 

Despite consumers’ persistent grumbling about high prices, Huerta has found that her customers haven’t stopped buying books. In fact, November’s Small Business Saturday, the last Saturday of the month, was Francie & Finch’s best sales day on record.

“In spite of all of the high prices on things, people are coming out for the holidays,” Huerta said. (Consumer confidence recovered somewhat last month as concerns about inflation have begun to recede, according to the Conference Board, although fears about a possible recession persist.)

Another sign that confidence in the U.S. economy is returning: More Americans are launching new businesses than in pre-pandemic years. 

Monthly applications for new high-propensity businesses — those that plan to have employees and pay wages — averaged about 145,000 in 2023. In 2019, that monthly average was nearly 108,000, according to a report from USAFacts, a nonpartisan website aiming to provide government data that is not easily accessible to the general public.

Some small businesses have benefited from the demand for labor. At Rust Belt Recruiting, the tight labor market and resulting high demand for workers meant the eight-person Ohio-based staffing company was perfectly positioned for higher profits since the worst days of the pandemic in 2020.

“We’ve been able to run a relatively debt-free company for years, and build it from the ground up,” said Evans, who founded Rust Belt six years ago. “Being a small business comes with its own challenges, but it also comes with its own benefits — you can pivot more quickly.”

Inflation remains a big concern

Persistent economic challenges — like higher prices and continued labor shortages — still weigh on the minds of small-business owners.

Higher prices remain a top concern: nearly one in four small business owners reported that inflation was their single most important problem in operating their small business, according to an October survey by the National Federation of Independent Business (NFIB). 

At Francie & Finch, the Nebraska-based bookseller, Huerta said higher prices hit the hardest not on inventory, but on shipping costs.

“Those have really gone up, whether it’s packing materials or the cost of postage itself,” she said. Huerta eventually had to pass that cost increase on to customers, she said, charging them higher fees when they order online. 

At Linda’s Bar and Grill in North Carolina, the cost increases have been even more severe. The restaurant’s Tar Heel Burger with fries and a Coke, a meal you could buy for about $13 in the pre-pandemic days, will now cost you about $20. That’s because Carini is still personally shelling out more for basics like beef and bread.

“That changes your cost structure diabolically,” he said. 

Worker shortages have also remained a problem for many firms, with the labor market only recently starting to show signs of cooling. 

It’s been a long-lasting double whammy for places like Linda’s, which spent much of this year — and last — adjusting to both higher costs and staffing struggles. 

“I’ve gone through more front-of-house people in the last three and a half years than I have in the previous 10,” Carini said.

Higher interest costs are an additional strain. The cost of servicing debts have also grown more expensive since the Federal Reserve began hiking interest rates from near zero in March 2022 to the highest level in two decades. The Fed’s key rate has stayed at a target range of 5.25% to 5.50% since July; that benchmark helps set lenders’ rates on everything from car loans to mortgages.

“That doesn’t help,” he said. “As a small business it’s hard enough to even try to secure funds.”

Wary of what comes next

Even if some small businesses have managed to survive a difficult four years, most owners are still wary of what lies ahead — particularly the prospect of a recession, as higher interest rates threaten to dampen consumer demand.

The Small Business Optimism Index dipped 0.1 point in October to 90.7, according to the National Federation of Independent Business. The index has remained below the 50-year average for nearly two years. 

“The mood out there is pretty clearly negative,” said Bill Dunkelberg, chief economist for the NFIB. 

That’s reminiscent of the mood among American consumers, who have also proven pretty pessimistic, despite signs that inflation is easing and the economy is growing.

Evans, who owns Rust Belt Recruiting, sees that uneasiness reflected in his clients. As 2023 progressed, he saw more manufacturing firms dial back their staffing efforts, step back from proactive hiring or let their headcounts shrink naturally through attrition. 

“Talk of a recession has been swirling around for a little while,” he said. 

“Even just the topic of the election year has created some hesitancy and reluctance,” he added. “There’s a lot of big questions that people really want the answer to.”

Chapel Hill’s main thoroughfare has seen many changes since 2020, Carini said. The waffle shop a few doors down shuttered during the pandemic after 48 years in business. The tavern at the end of the block is now a fried-chicken franchise.

Despite all the difficulties operating in this unfriendly post-pandemic environment, Carini has worked hard to ensure that Linda’s does not become just another local spot that didn’t make it.

“I know people love this place,” he said. “I didn’t want to just let it go quietly into the night.”