The Federal Reserve's 2025 Small Business Credit Survey, conducted by the network of 12 regional Fed banks and released on Tuesday, paints a clear picture of cost pressures facing U.S. small businesses in 2025.
Cost increases top the list of challenges. According to the survey, higher prices for goods, services and wages were the most frequently cited obstacles for smaller firms last year. Firms pointed to tariffs as a meaningful contributor to those rising expenses.
More than 40% of respondents said that higher costs tied to tariffs posed a financial challenge for their operations. The burden fell heaviest on retail and manufacturing companies, which reported the most acute tariff-driven cost pressure.
Among the firms that experienced tariff-related cost increases, 76% indicated they passed some portion of those higher costs on to customers, while 60% reported absorbing at least part of the added expense themselves.
Foreign sourcing and input price inflation. Nearly half of surveyed firms reported procuring at least some inputs from outside the United States. A large majority of those firms said prices for foreign inputs rose between 2024 and 2025, according to the report.
Despite those cost moves, the survey found that businesses generally did not respond by switching suppliers or by relocating operations to U.S. soil.
Tariffs and the broader inflation picture. The report notes that the tariff system implemented during the Trump administration contributed to inflation in 2025. Fed officials linked much of the overshoot of their 2% inflation target to those tariff-related tax increases. Most officials expect the inflationary impact tied to tariffs to lessen during the current year.
The Trump administration has maintained that tariffs are borne by foreign entities, and that tariffs are intended to attract industry back to the United States while generating government revenue. The administration has also used tariffs as a foreign policy instrument.
However, recent analyses from the New York Fed and the Congressional Budget Office found that tariffs are almost entirely borne by entities within the United States, a conclusion that runs counter to the administration's stated position. A Supreme Court ruling determined that the former president's tariffs exceeded his authority, though the president subsequently imposed additional tariffs on incoming goods.
AI adoption among small firms. The Fed survey also probed artificial intelligence use in small businesses during 2025. Just under half of small firms reported using AI, and an additional 15% said they planned to add the technology within the next year.
Small businesses most commonly employed AI for writing and marketing tasks, with individual productivity enhancement cited as the next most frequent application. The report found that AI did not materially alter labor costs for many firms, while it did improve productivity in numerous cases.
Taken together, the survey's findings underscore a sector grappling with higher input costs and mixed operational responses, even as some firms pursue productivity gains through new technologies.