Small Businesses Feel the Squeeze: How Rising Costs and Slowing Demand Are Hurting Main Street

In 2025, small businesses are having a tough time. Many businesses across different sectors are facing similar challenges. Costs are going up, with cost pressures from payroll, insurance, and raw materials. Fewer people are shopping. And things like high interest rates, inflation, and new tariffs are making it harder for them to survive. As a result, many small shops are cutting jobs and trying to save money wherever they can.

Recent data shows that small businesses with fewer than 10 workers cut jobs by 3.5% in the first part of the year. Even though some made more money, owners are being careful. Rising costs continue to be the primary concern for small business owners. These challenges have intensified over recent years, as expenses in labor, materials, and other areas have increased. With high startup and operating costs, there is little room for error for new and existing small businesses.

Tariffs Are Causing Big Problems

In April, President Trump raised tariffs on goods from China to 145%. That’s a huge increase. For businesses that buy from China, it made things much more expensive overnight.

One example is WS Game Co., a small family business in Massachusetts. They make fancy versions of board games like Monopoly. Because of the tariffs, they had $500,000 worth of games stuck in China. They also lost $16 million in orders from big stores. The owner says they only have four months before they might go out of business.

“We can’t move production quickly,” said Jonathan Silva, the owner. “We just don’t have the money or time to make that change.” Limited capital and working capital make it difficult for small businesses like WS Game Co. to adapt quickly to sudden cost increases, as they often lack the financial resources and flexibility needed to manage rising operational costs and cash flow disruptions.

Prices Are Going Up Fast

Jeremy Rice owns a flower shop in Kentucky. Almost all of the flowers he uses are made in China, and the cost of raw materials has increased significantly. Because of the tariffs, his vendors are raising prices by 20-25%. He stocked up ahead of time, but says he only has two to three months of flowers left.

“After that, I don’t know what we’re going to do,” he said.

Many store owners feel the same. Prices are going up fast, and it’s hard to find other places to get what they need. Recent data from the Consumer Price Index shows that prices for goods and materials have risen sharply, further impacting small businesses.

People Are Spending Less

Even businesses not directly hit by tariffs are in trouble. That’s because customers are holding onto their money. Changing markets and shifting consumer preferences are making it harder for small businesses to predict demand. Inflation and high interest rates are making people think twice before they spend.

Lisa McDonald owns a tea shop in Michigan. She sells special loose-leaf teas from all over the world. Some of her best teas cost $33 for a small bag. But if her prices go up because of tariffs, she knows customers won’t pay $75 for tea.

“We can’t just start growing tea in the U.S.,” she said. “It doesn’t work that way.”

Expanding operations or product lines is difficult for many small businesses in the current economic climate.

How Payment Processing is Affected

There’s another problem small businesses are facing: payment processing costs. These are the fees they pay every time someone uses a credit card.

Normally, a store pays 2-3% of a sale to the credit card company. That might not sound like much, but when prices go up and sales go down, those fees hurt a lot more.

In Chicago, Damion Love runs a clothing store called Belle Up Boutique. His costs are rising because of tariffs. Other expenses like insurance and employee benefits are also increasing, further squeezing profit margins. He worries that raising prices will scare off shoppers. If he doesn’t sell as much, the credit card fees take an even bigger bite out of what he earns.

Credit Card Use Is Up, But Payments Are Down

Small businesses are relying more on credit to stay open. They’re using credit cards to buy inventory or pay bills, but many aren’t paying off those cards right away. That means debt is growing.

Small banks play a crucial role in providing credit and business loans to small businesses, often with higher approval rates than larger banks. However, even with access to loans, maintaining revenue remains a challenge when operational costs are rising and sales are down.

A University of Chicago study shows that this credit gap is growing. More card use. Less paying off. That’s a bad sign.

“Small businesses show us what’s coming,” said economist Ufuk Akcigit. “They’re already in trouble.”

Payment Services Need to Do More

Because things are so tight, small business owners are looking for better ways to accept payments. They need:

• Lower credit card fees through strategies to reduce processing costs

• Faster access to their money

• Tools to pass processing fees to customers if needed

• POS systems that handle inventory and payments together

Smart point-of-sale (POS) systems like Clover can help with that. Companies like Velocity Merchant Services offer these tools to small businesses so they can spend less time on paperwork and more time on sales. These solutions also help maintain a steady cash flow even during periods of economic uncertainty.

The Economy is Slowing Down

The Federal Reserve recently said that business activity is slowing. Fewer people are shopping, and businesses are waiting to hire new workers. Experts say a recession could happen this year. Additionally, policy uncertainty regarding future tariffs and regulations is making it harder for small businesses to plan ahead.

Shipping companies are also seeing fewer goods coming into the U.S., which is another sign that the economy is slowing down.

In Oakland, a tree service business called Trees Company used to be booked weeks in advance. Now they have empty schedules. Owner Christopher Altman is using savings and credit to pay his team. Maintaining strong relationships with customers and suppliers is also crucial for small businesses like Trees Company to weather the downturn.

“I just kept waiting for orders that never came,” he said.

The Struggle is Everywhere

Jim Umlauf runs 4Knines, a company in Oklahoma that makes car seat covers. His products are made with materials from China. Now, the cost is too high. He says his company might run out of products soon.

Greg Shugar, who owns Beau Ties in Vermont, makes bow ties in America. But the fabric comes from China. If tariffs stay this high, he says his company might not survive the year.

Even if tariffs drop later, the damage might already be done. Many small business owners say the constant changes make it impossible to plan. Many owners are now focused on risk management and long-term survival rather than growth.

Digital Transformation: Adapting to the New Normal

Digital transformation is no longer just a buzzword—it’s a necessity for small businesses looking to stay competitive in today’s fast-changing world. Over the next five years, nearly all business owners are planning to invest in digital tools to help manage costs, streamline operations, and drive growth. This shift is happening across all industries, with owners recognizing that digital solutions are key to improving efficiency and profitability.

One of the biggest changes is in how small businesses accept payments. Customers now expect a range of payment options, from contactless cards to mobile wallets and online payments powered by integrated point-of-sale credit card processing. Younger consumers, in particular, are quick to move on if a business can’t offer a seamless digital payment experience. For small businesses, adapting to these preferences isn’t just about convenience—it’s about capturing every possible sale and keeping customers coming back.

Beyond payments, digital tools such as cloud-based POS systems help business owners manage data, control costs, and make smarter decisions. Whether it’s tracking inventory with a robust inventory management system, analyzing sales trends, or automating routine tasks, digital transformation gives small businesses the power to focus on what matters most: serving customers and growing the business. By embracing these changes, owners can create a more resilient operation, improve cost control, and set the stage for long-term profitability.

Business Continuity Planning for Uncertain Times

With rising costs, labor shortages, and ongoing supply chain issues, many small businesses are operating in survival mode. Nearly half of small business owners now say that inflation and rising costs are their top concern, while more than half are struggling to cover operating expenses or manage uneven cash flow. These challenges are putting pressure on day-to-day operations and making it harder for owners to plan for the future.

That’s why business continuity planning is more important than ever. For small businesses, this means identifying potential operational challenges—like sudden cost increases, supply chain disruptions, or labor shortages—and developing strategies to address them. By having a plan in place, business owners can reduce financial pressure, maintain stability, and protect relationships with customers, employees, and banks.

Business continuity planning also helps small businesses navigate broader economic conditions, such as changes in current interest rates or shifts in local economies. With a solid plan, owners can make informed decisions about investments, expansion, and growth, even when the outlook is uncertain. Ultimately, prioritizing continuity planning gives small businesses the tools they need to weather tough times, control costs, and create a stable foundation for future profitability and expansion.

What Can Small Businesses Do?

1. Check your payment processing fees – If you’re paying too much, look for better options.

2. Use smarter POS systems – These systems can help you track sales, inventory, and even customers.

3. Avoid over-ordering – Don’t get stuck with too much inventory.

4. Give more ways to pay – Let people pay with debit cards, ACH, or mobile wallets.

5. Reward your best customers – Use loyalty programs to encourage return visits.

6. Add a Cash Discount Program – This allows you to offer lower prices for cash payments and offset credit card processing fees.

7. Create Bundle Promotions – Use a POS system that supports bundling products together to add value without raising individual prices.

8. Use Loyalty & Promo Tools – Encourage repeat business and bigger purchases through digital punch cards, points systems, and seasonal promos, all managed through your POS.

Final Thoughts

Small businesses are tough. But right now, they need help. Rising costs, fewer sales, and high payment fees are too much all at once. The good news? There are tools out there to help. With better POS systems and smart payment partners, businesses can cut costs, improve efficiency, and survive this rocky time. If your business is feeling the pressure, don’t wait. Look at your payment system. Find ways to lower costs and get your money faster. Because in 2025, it’s not just about doing business. It’s about surviving.