2026 Small & Middle Market Report: Q2 Outlook & Growth Trends

Each quarter, we partner with Barlow Research to survey small business and middle market owners across the country. These conversations give us a deeper understanding of how businesses are feeling about their financial health, challenges and plans for future growth.

Here’s a quick look at what we learned this quarter and how we’re helping businesses navigate what’s ahead.

Financial Conditions: Steady, but Under Pressure

Small businesses continue to feel the impact of higher costs and uneven sales. Overall financial conditions remained mostly flat moving into the second quarter of 2026, with profitability still under pressure as expenses continue to squeeze margins. While capital spending rebounded after a slow start to the year, more small businesses reported declining excess cash reserves than increases, pointing to ongoing financial strain.

Middle market companies showed more stability. Overall financial conditions stayed in positive territory, and both sales and profits improved compared to prior quarters. That said, rising operating costs continued to weigh on margins, and many companies reported tighter cash reserves as fuel and operating expenses increased.

Looking ahead, both small business and middle market leaders remain cautiously optimistic. Confidence in future financial conditions stayed positive, but expectations softened slightly as economic and geopolitical uncertainty continues to shape planning decisions.

Sales, Profits and Cash Flow Trends

Small business sales and profits improved modestly, but both remain at a negative net difference overall. However, capital spending increased significantly after a weak first quarter, signaling careful reinvestment despite tighter cash positions.

In the middle market, profits moved into positive territory for the first time in more than two years. Sales gains helped this improvement, although many companies reported decreased excess cash reserves as costs continued to rise.

Across both segments, businesses are becoming more intentional with cash management, prioritizing stability and flexibility over aggressive expansion.

Hiring and Investment: A More Disciplined Approach

Hiring slowed among small businesses in the second quarter as owners focused more on controlling costs than expanding their workforce. While fewer businesses added full-time employees, capital spending showed signs of recovery, suggesting targeted investments where returns matter most.

Middle market companies also reported softer expectations for hiring and capital spending over the next 12 months. Many are shifting away from rapid growth strategies and focusing instead on disciplined, sustainable expansion amid continued uncertainty.

Even so, long-term confidence remains strong. Over the next five years, most small business and middle market leaders still expect their companies to grow.

Credit Demand Remains Muted

Demand for additional credit stayed limited in the second quarter. More than eight in ten small businesses reported no need for credit or chose not to borrow. Those that do plan to borrow are primarily focused on working capital rather than growth initiatives.

Middle market companies followed a similar pattern, with fewer applying for additional credit compared to earlier quarters. When financing is needed, most expect to work with their primary bank and use funds for equipment purchases, working capital or growth support.

This cautious approach to borrowing reflects a broader focus on balance sheet strength and financial flexibility.

What are Businesses’ Top Concerns in Q2 2026?

Rising fuel prices emerged as the top concern for both small businesses and middle market companies this quarter. Ongoing foreign conflicts and energy market disruptions have increased concerns around transportation and operating costs.

Beyond fuel prices, businesses remain concerned about the rising cost of doing business, cyber security and fraud, and government policy or regulation. Many also pointed to foreign conflicts and technology disruptions as growing risks to day-to-day operations.

These concerns are driving more cautious planning, with leaders focused on protecting margins, preserving cash and staying adaptable.

How is Live Oak Bank supporting business owners?

We understand the challenges businesses are facing, and we’re here to help. If you’re looking to:

We are ready to provide personalized financing solutions and expert guidance. We’re committed to helping businesses stay resilient and thrive in 2026 and beyond. Read the full 2026 Q2 BusinessPulse report here.