Editor’s note: It’s only February, and already there’s so much going on that small business owners need to know. To help prepare you for the year ahead, I asked one of our favorite contributors, Ben Johnston, the COO of Kapitus, to share his expert insights. —Rieva
Factors Impacting Small Businesses
- The New Administration: For small business owners, 2025 was a year consumed by the promise of change and the fear of what that change would bring. The year began with the Trump Administration’s return to power and optimism that low taxes and lighter regulation would deliver an economic boom. While the Administration delivered on these promises, it also delivered a volatile tariff strategy, a crackdown on undocumented immigration, and little change to the affordability issues troubling consumers. The net result has been anxiety for consumers who feel they are falling behind and for small business owners who depend on consumer spending to drive revenue.
- AI and Technology: Beyond politics, the economy lurched forward, driven by massive investment in new AI technologies, which offer the promise of tremendous efficiency but remain largely unproven. Many small businesses are eyeing these technologies warily as they work to incorporate new efficiencies into their businesses while trying to ensure that their core business model isn’t automated away. Others are embracing AI wholeheartedly and investing in what they see as the next generation version of themselves.
These investments are occurring across new technologies, including natural language models, which are used to write customized sales content, uncover new markets, and optimize key business decisions. The technologies behind self-driving cars and trucks are poised to disrupt supply chain management, and agentic AI is already being used to supplement salespeople and customer service agents. In addition, robotics and 3-D printing are enabling the repatriation of manufacturing back to the United States in a less labor-intensive and more cost-effective manner.
- The K-Shaped Economy: Small business owners are also working to position themselves in the emerging “K-shaped” economy. Named for the split recovery Americans experienced emerging from COVID, the K-shaped economy is one in which the wealthiest Americans drive growth in consumer spending, while everyone else suffers under rising inflation, slower wage growth, and higher unemployment. Well-off Americans with real estate and investment portfolios continued to prosper in 2025 as rising home prices and financial markets fueled wealth accumulation, while younger Americans—those saving to buy a home and retire one day—saw these goals slip further out of reach. The result is a bifurcation of the market, with one set of consumers focused on luxury and the other stretching every dollar. In this environment, small businesses are struggling to identify their core customer and position their offerings appropriately.
2026 Outlook: A Small Business Balancing Act
As we move into 2026, we expect the K-shaped economy to continue as AI adoption generates a reduction in demand for labor faster than the economy can create new jobs. We expect the current tax and tariff structure to largely remain in place, and that we’ll see continued economic stimulus through wide budget deficits.
As a result, we see the economy growing in 2026, driven by efficiency gains, technology investment, and economic stimulus, but expect consumer spending growth to be subdued as unemployment rises. Given this dichotomy, small businesses face a difficult balancing act of serving a bifurcated customer base while investing in new technologies and navigating a turbulent economy.
We expect 2026 to be a year of rapid technological advancement, placing pressure on small business owners to combat higher costs and lower margins through the adoption of new technology. Small businesses will also need to keep a laser focus on the needs of their customer base. Understanding which arm of the K-shaped economy your business is serving will be essential to success.
To navigate changes in government policy, technology, and consumer spending, small businesses will need to be nimble and have access to flexible financing solutions. This means determining what financing you are likely to need and developing relationships with a variety of financial services providers.
Many community banks have been consolidated into larger regional institutions, and others have scaled back their exposure to commercial credits. There are many non-bank small business lenders ready to fill the funding gap. Despite considerable uncertainty, we expect 2026 to be a prosperous and exciting year for small business owners and look forward to providing growth capital to this community, the most critical growth engine of the American economy.
Economic Factors to Watch in 2026
- Inflation, Employment, and Productivity: The Federal Reserve’s interest rate policy balances its goal to maintain a robust economy and full employment with its desire to limit inflation. The Fed cut interest rates three times for a total of 75 bps in 2025, on top of three cuts for 100 bps in 2024. These cuts do not appear to have stoked a meaningful change in inflation to date, but as tariffs become permanent and the government continues to spend trillions more than it collects in revenue, the threat of inflation remains constant.
One of the greatest weapons against inflation will be productivity growth. Today, business leaders and economic experts seem to be pinning their hopes on new AI technologies to usher in an age of automation and rapid productivity growth. History has shown that new technologies take years to work their way into business processes, so we do not expect a silver-bullet cure for inflationary pressures.
However, we do believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs. In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the economy evolves.
- Unemployment: The unemployment rate rose in 2025 from 4% in January to 4.6% in November, and we expect it to continue growing in 2026, despite a reduction in the immigrant labor pool. Unemployment is especially high among younger Americans with less experience, and entry-level jobs will likely be the first jobs automated away by AI. We can only hope that the dynamism of the U.S. economy is able to create new, inspiring roles for those being displaced by automation.
Tariff Policy and the Political Environment
The Trump Administration entered office in January 2025, determined to deliver on its promise of lower taxes, less regulation, smaller government, higher tariffs, tighter immigration, and a reduction in the undocumented population. Objectively speaking, it has delivered on most of these goals. However, it remains to be seen whether these policies will deliver the growth, low inflation, and improved employment prospects for the middle class that were promised along with these policies. Early indications are mixed.
What we do believe is that the tariff increases of 2025 are here to stay. We do not expect the Supreme Court to rule against the Administration’s ability to impose tariffs in a way that would meaningfully reduce their impact going forward or cause the money collected to date to be repaid. We expect current economic policy to remain in place through the swearing in of a new Congress in January 2027, with a bend toward higher tariffs and lower interest rates. The combination of these policies has the potential to drive inflation higher while the unemployment rate continues to rise.
Impact on the Restaurant Industry
- Restaurants: The restaurant industry experienced top-line growth in 2025, despite rising unemployment, as the high-end of the market was supported by robust consumer spending from high-income households, and quick service restaurants maintained a steady clientele of lower-wage earners seeking value. However, most restaurants saw expenses rise faster than they could pass costs on to customers, resulting in margin compression. A high-end restaurant today can expect to earn between 5% and 10% profit margins, with ~35% of revenue going to cover labor expenses. We expect labor costs to continue rising in 2026, as the crackdown on undocumented immigration weighs on the industry and further reduces margins for restaurants trying to keep menu prices as affordable as possible.
Fortunately, we expect the wealthy to continue spending freely in 2026, while everyone else focuses their limited discretionary spending on value providers. Keeping prices in line with consumer expectations will be challenging, especially with rising labor costs stemming from the crackdown on undocumented immigration.
We expect restaurants to continue investing in AI and automation technologies to reduce their labor and overhead costs, but given the manual nature of the restaurant business, these technologies will have less of an impact on margin expansion than in other industries.
- Hospitality and Travel: The hospitality industry grew more slowly than the restaurant industry in 2025 as consumers held back spending on travel and experiences. We expect hospitality and travel to continue to grow more slowly than the overall economy in 2026, as wealthier consumers travel frequently, while less affluent consumers substitute flights, hotels, and theme parks for local activities such as concerts, sporting events, and casinos. Hotels, conference centers, and airlines will continue to cater to a more affluent clientele, while business travel will grow more slowly as remote work and online collaboration become further ingrained in work culture.
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business finance. Kapitus provides growth capital to small businesses and has provided more than $8.5 billion to over 50,000 small businesses since 2006.
Kapitus offers multiple loan products for small businesses, including SBA loans, revenue-based financing, equipment financing, cash-flow factoring, revolving lines of credit, and invoice factoring.
Photo courtesy Cristina Gottardi for Unsplash+
