Facing both the tightest labor market and the highest interest rates in years, small business owners often face a tough trade-off: whether to emphasize hiring and retaining employees or focus on other aspects of running their businesses. In most cases, according to the latest CNBC/SurveyMonkey Small Business Survey, larger small businesses want to get bigger while the smaller ones are more content just the way they are. There is one reason revealed by the survey why smaller businesses are less likely to be expanding and hiring with confidence: interest rates.
As President Donald Trump and members of his administration press the Federal Reserve to cut interest rates by as much as 1% rather than raise them, arguing the move will boost the economy, there is one business segment where Trump might find support: the smallest shops on Main Streets across America.
Those with few employees are more likely to be preoccupied with interest rates than hiring. Nearly 4 in 10 (37%) of those with fewer than five employees say borrowing costs are too high right now, compared with a quarter of those with bigger operations.
High interest rates make it more expensive to take out loans and drive up the prices of raw materials. For those small businesses with few or no employees, those are regularly the biggest costs, putting a further damper on their expressed interest in adding employees to their payrolls. Furthermore, one-third of all small businesses say interest rates are too high.
The Main Street views on interest rates contrast with the view from major corporations revealed in the latest CNBC Global CFO Council Survey, released on Tuesday. Not a single U.S.-based CFO taking the survey said interest rates are too high, and globally only 4% of CFOs said rates are too high. The majority of CFOs believe the Fed will neither increase nor decrease rates for the remainder of the year, which echoes current commentary from Fed officials.
Small business frustration with rates may be about something other than just central banking.
"Interest rates historically are relatively low, but a lot of smaller companies don't have assets that can be used as collateral for loans and still have a hard time getting a traditional bank loan, so could be relying on credit cards, and those interest rates are still high," said Todd McCracken, president and CEO of the National Small Business Association. "That could be a part of what they are saying."
Overall, 60% of all small business owners in the new survey expect revenue to increase over the next 12 months, but how they intend to spend that money depends largely on firm size, reflecting competing top concerns for small businesses.
Among all small business owners, the proportion saying they expect to increase headcount in the next 12 months ticked up three percentage points from the Q1 survey, to 31% this quarter, placing it right around the two-year average (30%).
Higher headcount expectations are up this quarter among businesses with five to nine employees (up 11% to 46%) and the largest of the small business (up 6% to 65%). By contrast, the smallest of small businesses intend to stay that way: Just 19% of small business owners with fewer than five employees say they expect their full-time staff to increase over the next 12 months, essentially unchanged from last quarter's 18%.
A majority of all small business owners say hiring has gotten more difficult over the last year, though this is less of a concern among those with the fewest employees. Just under half (47%) of small business owners with fewer than five employees say it's now harder to find qualified people to hire than it was a year ago, and nearly no one (5%) says it's easier.
But a substantial 1 in 5 (19%) small business owners with at most four employees say that hiring concerns are "not applicable" to them, indicating how comfortable they are at exactly their current size.
Most small businesses fall into this zero to four employee category, which means that small business growth — at least in terms of headcount — is typically concentrated among the few small businesses that have already reached a critical mass.
While some of the smallest of small businesses want to stay at their current size, plenty of others want to grow, and they are prepared to invest in their workforces in order to do so.
Small business owners with five or more employees are more than twice as likely as those with four or fewer to say they expect their full-time staff to grow in the next 12 months, but they're also more likely to say they have difficulty finding new workers. A clear majority of small business owners with five or more employees report hiring concerns: 58% of those with five to nine employees, 61% of those with 10 to 49 employees, and 63% of those with 50 or more employees say it's gotten harder to find qualified new hires in the past year.
To attract more workers — and, importantly, qualified ones — these small business owners know they'll have to spend more cash. Overall, 24% of small business owners say they expect the cost of labor to outpace the cost of capital or the cost of raw materials in the next 12 months. That percentage jumps to 34% among businesses with 10 to 49 employees and to 44% among businesses with 50 or more workers.
In previous quarters, our CNBC/SurveyMonkey Small Business Survey has found that small businesses are going to great lengths to recruit new workers, offering higher wages, additional training, and even non-monetary incentives like flexible work arrangements and mentorship opportunities.
Those extreme measures often come with a real cost — one that is more easily borne by larger small businesses who are more likely to have more resources to start. A majority of all small business owners expect revenue to increase in the next year, but that percentage increases with firm size, from 57% among small businesses with zero to four employees to 70% among those with 50 or more.
With the costs of capital and raw materials ranking lower for them, small business owners who already have more employees have the advantage of dedicating more of their extra revenue to invest in their workers.
— By Laura Wronski, senior research scientist, SurveyMonkey, and Jon Cohen, chief research officer, SurveyMonkey