The state of SMB finances:

Small and mid-sized businesses (SMBs) worldwide are proving to be resilient, as economic growth accelerates post-COVID. But challenges still loom, as these companies struggle with the impact of inflation, expensive financing, tight labor markets, cyberthreats, and an accelerating pace of technological change.  
 
These companies are a linchpin in the global economy, responsible for a significant share of business activity and employment. Experts estimate today there are roughly 400 million small businesses globally, which account for over 95% of all companies and generate 60% to 70% of jobs worldwide.  

SMBs play a dominant role in developed economies like the U.S. and Canada. In Canada, for instance, businesses with fewer than 100 employees made up 98% of all companies nationwide and employed nearly 11 million people. Nearly three times as many Canadians work for small businesses than larger ones. And in the U.S., their impact is similarly large: There are more than 33 million small businesses that account for 99.9% of all U.S. companies and have generated nearly two-thirds of all new jobs created from 1995 to 2021. 

There is a wealth of data and information available about the state of the SMB market in North America, covering everything from their economic impact, technological developments, and even regulatory changes. And it can feel overwhelming to know how to find and interpret all of the information out there. 
 
But don’t worry — we've done a lot of the legwork for you. In this report, we explore some of the most interesting and relevant data on SMBs to help business owners better understand where they stand today and prepare for what’s next. 

The current economic outlook for SMBs

Smaller companies all over the world had a tough time during COVID. One survey found that more than a quarter of small businesses globally — and up to 50% in some countries — closed at some point during the first half of 2020, and two-thirds saw sales decline compared with the same period in previous years. These businesses wrestled with supply chain issues, worker shortages, forced closures, and shifting demand patterns during the crisis.  
 
As the pandemic receded, inflation surged, which has caused further disruption. Central banks raised interest rates, making financing more expensive for everyone. Cybersecurity threats intensified, with smaller companies targeted for ransomware, fraud, and data theft. Plus the emergence of powerful technologies like artificial intelligence intimidate some companies that are seeking to build up capabilities to compete with larger organizations.

What are small business owners’ biggest worries?

Despite the relative strength of the SMB sector, entrepreneurs face a variety of challenges. Canadian SMBs with fewer than 20 employees ranked rising inflation as their top concern, followed by the rising cost of raw materials, higher interest rates and debt costs, recruiting and retaining skilled employees, and the cost of insurance.

In the U.S., inflation is also a worry, with over half of small business owners naming it as their top challenge in the MetLife and U.S. Chamber of Commerce Small Business Index. Although inflation has declined from its post-COVID highs, a nudge upwards early in 2024 has business owners concerned. In March of 2024, small business optimism, as measured by the National Federation of Independent Business’ index, declined to levels last seen in December 2012, with many respondents citing higher costs for labor and raw materials as a factor.

As interest rates rise to combat price increases, American business owners also struggle to obtain credit. In early 2023, fewer than half of U.S. small business owners said they had good access to capital, down from 76% in 2017. Some 80% of small business owners reported paying higher interest rates, as of the end of 2023, with average rates topping 9%.

And finally, finding skilled labor remains an issue, as unemployment remains low and wages rise, though many smaller businesses have cooled their hiring activity. For instance, only about 11% of U.S. small businesses surveyed in March 2024 planned to hire within the next quarter — the lowest level since May 2020. That’s partly because while businesses have been raising pay steadily, they may be reaching their limits. The number of small companies offering higher compensation slipped to 38% in March, a three-year low. 

SMBs are showing resilience

Throughout all this change, the SMB sector has remained remarkably robust. In 2021, during one of the worst economic disruptions in recent history, a record-breaking 5.4 million new business applications were filed in the U.S., according to the U.S. Chamber of Commerce.  

Goldman Sachs found that retained earnings for small businesses — that is profits after salaries and dividends  — averaged 2.5% in the second quarter of 2023. That’s a healthy level despite inflation, higher interest costs, and other headwinds. 

Many business owners feel they’re doing well because of the steps they took to weather the last few years of turmoil. One Canadian survey found that 86% of the entrepreneurs who participated felt they were in a better position financially because of steps they took to prepare for a recession.  

Small business owners are looking toward the future with a sense of cautious optimism, according to one recent survey of American small business owners, which found that 90% of respondents had a positive outlook on the future of their business. However, inflation, interest rates, and rising costs for supplies and materials remain a concern for more than half of them moving forward. 

The common thread is this: On every front, small businesses are being asked to do more with less. Let’s look at how technology an increased role to resolve this tension for small businesses and where these companies are placing their bets.   

Technological advancements are crucial to SMB survival 

SMBs are making a big commitment to technology, accounting for over half of the world’s $370 billion technology spending. These companies even outspend their larger counterparts in several technology categories, including wireline, wireless and technology devices, lagging behind only in software. 

However, inflation is putting pressure on these businesses. Many are looking to reduce their overall spending on technology and focus their budgets on technologies with bottom-line impact— especially those that can help reduce labor costs and increase operating efficiency. In a 2024 survey of American small business owners, 50% said they were likely to allocate more of their budgets to technology and infrastructure, with the strongest interest in artificial intelligence (50%), productivity and collaboration tools (41%), and communications technology (34%).  

AI and automation will have a major role to play 

Interest in AI has grown explosively, with one survey finding that nearly three-quarters of small companies would like to explore using the technology in their businesses. However, only about a quarter (26%) have begun to implement artificial intelligence, with most companies employing it for social media (52%), generative content creation (44%), and email marketing (41%).  
 
AI-powered content solutions like ChatGPT, Jasper.ai, and Grammarly, for example, can be incredibly powerful tools for small businesses when it comes to generating or improving their marketing materials like blogs, newsletters, even social media content, without necessarily needing to hire a full-time employee to manage these activities. 
 
There are also AI-driven software platforms and integrations to help small businesses manage everything from automatically recording meeting notes to CRM to employee engagement, and even customer service chatbots that can be integrated into a business’ website. 
 
Companies that have put these tools to work say that AI is already making a difference. Over half (60%) say it saves them time and lets them work more efficiently, and more than a quarter (28%) expect that AI and automation will save them at least $5,000 in the next year.  
 
Getting ahead of the curve on emerging technologies like AI and automation can pay big dividends for smaller companies. One survey found that early technology adopters were more likely to report achieving business objectives and growing revenue than their tech-laggard peers.  

Finding the right technology fit 

Technology can be a key factor in preparing small businesses for the future, allowing them to achieve the scale and cost efficiencies that allows them to grow and thrive. But small business owners may lack the resources to evaluate, implement, and manage the innovative technologies that will grow their businesses. While many SMBs maintain IT teams, these groups are often focused on running and maintaining existing systems — and not on implementing or staying current with emerging technologies. As a result, some 45% of small businesses use external consultants to manage technology for them, and half look to these partners to suggest new tools and capabilities.  
 
Experienced partners can help them find the right software and solutions at a cost that makes sense for any business. If a business doesn’t have resources or networks to bring in these partners, there are a number of software review sites like G2 that can help small business owners research the best solutions for their business. 

Fintech partnerships open up possibilities for SMBs

One way small and medium-sized businesses can potentially tap into innovative technology is through bank and fintech partnerships. 

Open banking — a system that will enable banks to share data with third-party partners like fintech companies — can provide SMBs and their customers access to a broad range of financial functions, including payments, accounting, customer financing, cybersecurity, data privacy, and customer service. These services are provided through easy-to-use mobile phone apps and they are fortified with comprehensive protection from fraud, data theft, and other forms of cyber-attacks.

These partnerships have become ubiquitous. Today, 83% of all banking customers use digital tools for at least one financial task. Financial institutions have rushed to form partnerships to serve this need. Currently four out of five of the world’s largest banks (by assets) partner with at least one fintech company, and most maintain multiple relationships; the average number is four.

It’s important for SMBs to stay updated on these initiatives, as open banking enables them to build solutions tailor-made for business owners.  

Open banking regulation is growing

Third-party access to sensitive financial data creates new opportunities as well as some risks. Regulators are working to establish a framework to protect customer data and assets in multiple jurisdictions.  

In the U.S., the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the office of the Comptroller of the Currency jointly issued guidance for banks seeking to partner with fintechs in the summer of 2023. In 2024, the Consumer Financial Protection Bureau (CFPB)  proposed additional rules to ensure third-party access would not compromise the safety and security of consumer data held by banks.  

In Canada, the federal government announced its 2024 budget will include legislation that creates a framework for open banking. The legislation will establish a framework for open banking, including rules, accreditation standards, and technical requirements. Canada’s government expects to implement this legislation in 2025.

AI is a focal point for regulators

Governments are also grappling with the issues raised by artificial intelligence, a key component of many of these tech-forward financial partnerships. Platforms are using AI to deliver hyper-customized personal service, to augment fraud detection, and as part of their overall risk management capabilities, among other applications. This emerging technology has extraordinary potential but carries risk. Government regulators are currently working to understand and manage the implications of AI.  
 
The EU was first to issue comprehensive regulations in its EU Artificial Intelligence Act, passed in March 2024. AI regulation in the U.S. is still at its earliest stages. President Biden issued an executive order in October 2023, setting disclosure requirements and assessing the risks of AI on critical infrastructure and national security, and increasing funding for AI research and development. In addition, several states have enacted legislation addressing AI’s impact on privacy and data security.  
 
Canada issued a voluntary code of conduct governing AI in the fall of 2023. The code follows guidelines proposed in the Artificial Intelligence and Data Act (AIDA), which has been introduced in the Canadian legislature in 2022 but has yet to be enacted.   
 
Regulators are working hard to ensure that even in an environment of very rapid change, fintech and banking customers can be assured their funds, and their data remains safe, that they are protected from fraud and deception, and they have access to the best products, tools and services to manage their finances. These efforts are likely only the very first steps of a process that will continue to adapt to changing technological capabilities.  

Charting the path forward

There’s no question the last few years have been challenging for small and mid-size businesses. From a global pandemic to rampant inflation, from supply chain challenges to world-changing technological advances, business owners have had to adapt quickly — and in a smart, flexible way — to stay ahead of the competition. And there’s no reason to believe that the pace of change will slow.  
 
SMBs face challenges that are financial and operational. To succeed, they will need to take a hard look at every aspect of their business. Here are some suggestions for how to tackle key areas that impact how your business plans, operates, and adopts tools that make your (man) jobs easier.  

Navigating uncertain financial periods

One of the most effective ways for small businesses to prepare for potentially uncertain financial periods in the future is to analyze the current state of their cash flow. Understanding where you stand from a cash flow perspective will enable you to plan much more accurately for the future, while streamlining the cash management process to better align cash inflows and outflows can provide some breathing room in the event of a more challenging period.  

Our guide to cash flow management outlines strategies for optimizing payments into and out of the business.  

Improving operations to stay competitive

An adaptable business is a resilient business. Taking a systematic look at workflows within the company — and identifying bottlenecks — can significantly improve efficiency. Analyze if and or where operational inefficiencies exist in your business. These inefficiencies may not necessarily be causing you problems today, but they may make it more complicated for your business to scale or adapt to shifting situations in the future.  

Our guide to improving workflows through automation can help business owners leverage today’s technology to optimize the way their finance team operates.  

Using technology to address challenges and get ahead

Technology can enable small and mid-sized companies to scale flexibly and cost-efficiently, taking advantage of opportunities as they occur. Data analytics empower your finance teams to do more than just crunch numbers, finding the patterns and trends that will shape their industry moving forward. The cloud keeps data safe, while enabling companies to grow with customer demand. And, finally, applications in AI and automation can enable small and mid-sized companies to do more with less, freeing staff members from mindless rote work to focus on strategy and customer care.  

Check out our map to creating the best fintech stack for your business.  

Preparing for the next wave of technology innovation

An experienced fintech partner can help you navigate all this change and anticipate the opportunities that evolving technology can bring. As regulation around AI and open banking becomes more clearly defined, banks and fintechs will be able to offer even more and better capabilities in payments, cash management, risk monitoring, and customer service to small and mid-sized business clients. 

Meeting the changing needs of customers

Ultimately, the success or failure of any business, of any size, is determined by its ability to meet customer needs. 
 
For example, Point of Sale (POS) financing — like Buy Now, Pay Later — is the fastest-growing consumer lending segment with a more than 20% year-over-year increase in volume from 2022 to 2023. As a small business, are you prepared from a financial and technological perspective to meet this demand from consumers? Do your current providers, partners, and systems enable this type of transaction for your customers? 
 

The future is coming — and fast. Consumer behavior is ever-changing, and it’s important for small businesses to be able to adapt to meet them where they are. As small businesses chart the path forward into the next 6-12 months, it’s clear there are many more challenges and opportunities on the horizon.  
 
Regardless of what’s next for your business, increasing efficiency and eliminating manual work – not to mention human errors – is always a great way to increase productivity and prepare for the road ahead. Plooto’s payment automation platform can lighten your load and help you stay ahead of the curve.