You’ve probably heard people talking about the “K-shaped economy”—and if you’re a small business owner, you may be wondering what it actually means for you. Why are some businesses thriving while others are barely hanging on? And more importantly, how do you figure out which side of that “K” you’re on?
This kind of economic language can feel abstract, but the effects are showing up in very real ways: uneven customer spending, unpredictable demand, and wider gaps between businesses that are gaining momentum and those struggling to regain footing. To help cut through the jargon and get a clearer picture of what’s happening, I reached out to Ben Johnston, the COO of Kapitus, a small business lender and marketplace. Johnston works closely with entrepreneurs every day, giving him a front-row view of how this uneven recovery is playing out across the country—and what small businesses can do to stay resilient.
In Part 1 of our conversation, he breaks down what a K-shaped economy is, how we ended up here, and the strategies small businesses can use to navigate the road ahead.
Part 1: What is a K-shaped economy, how did we get here, and how can small business owners navigate it?
Rieva Lesonsky: Can you briefly describe what a K-shaped economy is?
Ben Johnston: A K-shaped economy describes an uneven economic recovery where certain individuals, groups, or industries experience robust recovery while others experience little recovery or continue their downward spiral.
Lesonsky: How did we end up in a K-shaped economy? What were the key drivers? Help us understand the “why,” not just the “what.”
Johnston: The K-shaped economy began with the recovery from the Pandemic. Generous government benefits enabled many small business owners and lower-wage earners to benefit from the PPP program and enhanced unemployment insurance. These benefits helped narrow the wealth gap in America and allowed many workers to delay returning to work. However, when the benefits expired in the latter half of 2021, the gap between upper and lower-income Americans began to widen again.
In addition, the excess government stimulus injected into the economy created demand for goods and services that could not be met by the available labor pool and production capacity. As a result, prices began to rise. As prices rose, so did asset values, from real estate to the stock market. Everyone had cash, and everyone was buying.
Unfortunately, not everyone benefited from this situation. Those with large stock and real estate portfolios saw their net worth rise. They also tended to be older Americans with good-paying jobs and fixed-rate mortgages. So, their assets went up, and their largest monthly expense, their mortgage, stayed the same. As inflation took off, expenses rose for everyone, but wealthier individuals tended to see annual wage increases that covered much of these increases.
On the other hand, low-wage earners and younger Americans had not accumulated significant wealth and therefore did not benefit from asset appreciation. To the contrary, those assets they had been saving for, like a home and a retirement portfolio, were getting more expensive. As was the cost of everyday living. For lower-income Americans, wage growth wasn’t keeping up with inflation, and unemployment was beginning to rise. To make matters worse, student loan repayments, which had been paused by the government during the pandemic, were now being reinstated, further depressing the cash flows of lower-income families. The resulting consumer spending power of these two groups reflects the K-shaped economy we are living in today.
Lesonsky: Do you expect the K-shaped economy to get steeper in 2026, or start flattening out? What indicators are you watching?
Johnston: We expect the K-shaped economy to persist throughout 2026 as inflation continues to rise, driven by tariffs, a crackdown on the use of undocumented labor, and continued interest rate cuts, which will propel asset values higher. We are keeping a close eye on inflation and unemployment, which are key indicators of the financial health of those suffering through the bottom leg of the “K.”
Lesonsky: What mistakes do small businesses make when they don’t realize they’re in a K-shaped environment?
Johnston: Small businesses should be careful not to depend too heavily on consumer spending from customers with little savings in lower-income brackets, or who are living on fixed incomes. These segments of the economy will continue to struggle as above-target inflation persists and employment weakens.
Lesonsky: Are there opportunities to expand in a K-shaped economy?
Johnston: Businesses focusing on the information economy and high-end consumers are poised to outperform. However, small businesses that are targeting the mass market would do well to focus on value offerings that deliver critical products and services at discounted prices.
Lesonsky: If we remain in a K-shaped recovery, what long-term strategies should small business owners adopt?
Johnston: Business owners will want to closely track the habits of their customer base to understand changes in demand driven by the ability to pay. If unemployment continues to rise, small businesses serving the bottom of the “K” will want to limit inventory and control costs in anticipation of reduced demand. However, those small businesses serving the top of the “K” may want to invest in new products and services that capitalize on emerging trends in technology, travel, and popular culture, as this customer base may feel emboldened by the efficiencies they are seeing in their investments and experiencing in their private lives from the use of new technologies.
Lesonsky: If you could give small business owners only one piece of financial advice for navigating the K-shaped economy, what would it be?
Johnston: Be laser-focused on customer demand and changes in buying trends, as changes in the economy will quickly be reflected in consumer spending.
Part 2: How a K-shaped economy affects a small business’s ability to secure financing
Of course, understanding the K-shaped economy is only the first step. The next—and often most pressing—question for small business owners is how these economic divides affect their ability to access the capital they need to operate and grow. In Part 2 of our conversation, Johnston explains how lenders are evaluating businesses right now, which funding options remain open to business owners on either side of the “K,” and how to make smart borrowing decisions in an unpredictable economy.
Lesonsky: Before we can talk about borrowing or financing, small business owners need to know what red flags to watch for in their own operations. What are the most common financial warning signs business owners should watch for in a K-shaped economy?
Johnston: A slowdown in consumer spending is the largest warning sign that small business owners should look for. Most small businesses have relatively fixed overhead, so a reduction in demand can quickly eliminate margin.
Lesonsky: How does the K-shaped economy affect a business’s ability to secure financing? Are lenders looking for different metrics or documentation right now?
Johnston: Lender requirements generally haven’t changed in recent months. Banks generally require a business to have a history of profitability, strong personal and business credit, and to post collateral (such as real estate or equipment) against a loan. Non-bank lenders are typically more flexible, often requiring less time in business and little or no collateral. Many non-bank lenders base their underwriting primarily on the credit profile of the applicant and the recent cash flow of the business. While these loans are often more expensive, credit decisions are generally made much faster, with a higher likelihood of an offer.
Lesonsky: Not all businesses are benefiting from the same recovery. Are there funding options that are still accessible to businesses on the “lower leg” of the K?
Johnston: Businesses serving the lower leg of the “K” should explore all financing options available to them, but may have better luck with non-bank lenders who are willing to take more risk in exchange for a higher rate.
Lesonsky: Does the K-shaped economy change how business owners should think about debt—good debt vs. risky debt?
Johnston: We advise businesses to take on debt to finance growth. This means borrowing to obtain the capital needed to take on a new job, purchase inventory and equipment, hire additional staff, or to help finance the acquisition of a competitor. Each of these use cases should have an expected revenue and profitability target associated with it, and that profitability should be more than enough to extinguish the debt. This is the conservative and profitable way to use leverage to finance growth.
Lesonsky: What are the smartest financial moves a business can make right now—regardless of which “leg” they’re on?
Johnston: Invest in the needs of the customers. Offer great service and look for ways to provide value to the customer that your competitors aren’t offering.
Lesonsky: What cost-cutting moves are actually smart—and which ones harm a business long-term?
Johnston: Eliminating products that aren’t selling well or have become too expensive to source (possibly due to tariffs) is a smart way to focus your attention on what’s working and eliminate what isn’t.
Lesonsky: Should small businesses adjust pricing strategies when customers are split between “doing well” and “struggling”?
Johnston: Small businesses should adjust their pricing strategies to optimize their unique supply-and-demand curves. If they expect to sell more product at an acceptable margin by lowering prices, then they should do so. If the price cuts required to sell more would make the product uneconomic, then they must hold firm. If the product is uneconomic at any price, they should discontinue it, unless it is a loss leader supporting the sale of other high-margin products.
Navigating the K
The K-shaped economy may feel confusing at times, but the message for small business owners is ultimately straightforward: stay close to your customers, pay attention to shifts in demand, and make thoughtful, informed choices about spending and growth. Economic divides like this don’t affect everyone equally—but understanding where your customers are, how they’re feeling, and what they can afford will help you make smarter decisions in uncertain times. As Ben Johnston reminds us, the signals show up early if you know where to look. By staying flexible, focusing on value, and investing in what truly matters, small businesses can navigate the challenges ahead—and even find new opportunities in the process.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
Photo courtesy Planet Volumes for Unsplash+
