Small businesses — firms employing fewer than 20 people — account for approximately 97 per cent of all Australian businesses and employ around 5 million people. Their collective health is a critical indicator of the economy's underlying momentum. The major small business conditions surveys have been delivering concerning readings for the past 12 months, and understanding what those readings mean requires unpacking what they actually measure.

What the Surveys Measure

The NAB Small Business Survey and the COSBOA-Xero Small Business Insights both track conditions and confidence across a range of indicators: trading conditions, profitability, staffing intentions, capital expenditure plans, and credit conditions. Conditions and confidence often diverge — a business can be experiencing poor current conditions while remaining confident about the future, or vice versa. Right now, both conditions and confidence are soft, which is the more concerning combination.

The Profitability Squeeze

The most persistent theme across small business surveys is a profitability squeeze driven by rising input costs — particularly labour, rent, and energy — that cannot be fully passed through in prices because customer spending is under pressure. This margin compression is the defining financial reality for many small businesses in 2025. It is distinct from the revenue problem: many businesses have maintained revenue, but their margins have been significantly eroded.

Credit Conditions

Access to credit for small businesses has tightened, partly reflecting lenders' own caution in a higher-rate environment and partly reflecting the deterioration in some borrowers' balance sheets. The rate of small business insolvencies has risen significantly from the COVID-era lows — when government support kept many businesses alive that would otherwise have failed — toward, and in some sectors above, pre-pandemic levels. This normalisation was expected, but its pace and composition are worth monitoring.