The Federal Reserve’s 2026 Small Business Credit Survey describes a cost squeeze: input and wage costs are the top financial challenge, while revenue and hiring expectations have slipped to their lowest levels since 2020. For owners across construction, transportation, manufacturing, retail, wholesale, and services, that gap is fundamentally a working-capital problem — and there are practical ways to bridge it.

Ask any owner running a business between $1 million and $10 million in revenue what changed in the last year, and you’ll hear a version of the same answer: the costs went up faster than the prices could follow. Materials, freight, insurance, wages — all higher. Meanwhile the order book feels less certain than it did a year ago. That is the squeeze, and the latest federal data confirms it isn’t just a feeling.

What does the Fed’s 2026 Small Business Credit Survey reveal about the year ahead?

The Federal Reserve’s 2026 Report on Employer Firms shows small business owners growing more cautious about revenue and hiring even as day-to-day performance holds steady. Drawing on the 2025 Small Business Credit Survey of more than 6,500 employer firms, the Fed found that the revenue expectations index fell six points year over year, from 39 to 33, and the employment expectations index slipped from 26 to 23 — both the lowest readings since the 2020 survey, according to the Federal Reserve Banks.

Sentiment is one thing; the rearview mirror is another. Firms were also slightly more likely to report that revenues decreased rather than increased over the prior 12 months, per the 2026 Report on Employer Firms. When more businesses are shrinking than growing — and when owners expect that pressure to continue — every dollar of working capital has to work harder.

Why are small business costs rising in 2026?

Rising costs of goods, services, and wages were the most common financial challenge small businesses reported over the prior year. That single finding sits at the center of the 2026 report: not access to customers, not competition, but the cost of simply operating. Tariffs are a meaningful part of the story — more than four in 10 firms reported that increased costs associated with tariffs were a financial challenge, with retail and manufacturing firms hit hardest, according to the 2026 Report on Employer Firms.

The supply chain compounds it. Nearly half of firms source at least some of their inputs from outside the United States, and a large majority of those firms reported that those inputs rose in price between 2024 and 2025, per Fed Communities. For an importer of materials or finished goods, that is a direct hit to margin that either gets passed to customers — risking demand — or absorbed, eroding the very cash the business runs on.

Why do rising costs and falling revenue create a working-capital gap?

A working-capital gap opens when the cash a business spends to operate rises faster than the cash coming in — forcing owners to fund the difference out of reserves or borrowed capital. When input and wage costs climb while revenue expectations fall, that gap widens from both sides at once: payroll, inventory, and supplier invoices come due on their old schedule, but the revenue meant to cover them is slower, smaller, or less certain.

This is why the squeeze is dangerous even for profitable companies. A business can be profitable on paper and still run short of cash in the weeks between paying for materials and collecting on the work. Cash-flow strain is the most cited culprit when small businesses fail — among businesses that don’t survive, an often-cited U.S. Bank study found that poor cash-flow management was a contributing factor about 82% of the time, as reproduced by Preferred CFO. The lesson isn’t to grow revenue at all costs; it’s to make sure cash is available when the bills arrive.

What does the financing data say about how owners are coping?

Most small businesses now treat outside financing as a normal operating tool rather than a last resort — but getting the full amount requested is far from guaranteed. In the 2026 report, the most common reason firms sought financing was simply to meet operating expenses, cited by 56% of applicants, and roughly 60% of firms applied for financing in the year before the survey, according to the 2026 Report on Employer Firms. Borrowing to cover operations — not just to expand — is itself a signal of the squeeze.

The gap between demand and fulfillment is the part owners feel most. Only about 42% of applicants received the full amount of financing they sought, and roughly a third of firms faced a funding gap despite applying, per Fed Communities. In other words, more businesses need working capital to bridge rising costs, but traditional channels are saying a partial “yes” — or no — more often than owners would like. That shortfall is exactly where the right financing partner matters.

How does flexible working capital bridge the squeeze?

Flexible working capital bridges the squeeze by funding the gap between when a business pays its costs and when it collects its revenue — structured around the company’s actual cash cycle rather than a rigid, one-size-fits-all template. At Capital Source, that work runs through our Deal Desk and our affiliate lending arm, Capital Source’s Stretch Finance program. We start with the operator’s reality — the seasonality, the receivables, the supplier terms — and design capital to fit it, instead of asking the business to fit the product.

None of this is a promise of approval, a specific rate, or a guaranteed outcome — availability, amounts, and terms depend on each business’s circumstances and underwriting. What it is, when traditional banks pull back, is a path worth exploring with a partner who looks at the whole picture. We work with owners across the industries we fund — construction, transportation, manufacturing, retail, wholesale, and services — who are navigating precisely this kind of pressure.

Key takeaways

• The squeeze is real and federal data confirms it. Revenue and hiring expectations are at their lowest since 2020, while rising costs are the top financial challenge for small businesses.
• Tariffs and imported-input prices are biting. More than four in 10 firms cited tariff costs as a challenge, with retail and manufacturing hardest hit.
• Rising costs plus softer revenue equals a working-capital gap. Profitable businesses can still run short of cash between paying for inputs and collecting revenue.
• Demand for capital is high, but full funding isn’t automatic. 56% of applicants sought financing for operating expenses, yet only about 42% received the full amount requested.
• The right structure matters more than ever. Working capital built around a business’s actual cash cycle is how owners bridge the gap and stay in motion.

Frequently asked questions

Sources

• Federal Reserve Banks, Fed survey: Small business optimism wanes as performance metrics hold steady (March 2026).
• Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey.
• America’s SBDC, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey.
• Fed Communities, Key insights from the 2025 Small Business Credit Survey.
• Preferred CFO, Cash Flow: Reasons Small Businesses Fail (citing a U.S. Bank study).

This article is for informational purposes only and does not constitute financial advice. Figures are drawn from the sources listed and are current as of their respective reporting periods. Capital Source provides commercial financing solutions; availability, amounts, structures, and terms depend on each business’s circumstances and are subject to review and approval.