The essential guide to HR challenges for SMBs [2025]

Running HR at a small or medium-sized business sometimes feels like a juggling act—you’re simultaneously managing recruitment campaigns, navigating complex compliance regulations, building company culture, and overseeing performance management with just a fraction of the resources that enterprise teams enjoy.

While your larger competitors deploy specialized teams for each HR function, you’re often a department of one, expected to be an expert in everything from employment law to employee engagement. The challenges are real, but they’re not insurmountable with the right approach.

This guide walks you through the most pressing HR challenges for SMBs and provides practical, cost-effective solutions you can implement right away. Whether your biggest challenge is leadership development, managing compliance risks, or creating career paths in a company with limited seniority levels, there are actionable strategies that can help. They don’t require enterprise-level budgets or specialized staff—just smart prioritization and strategic use of your existing resources.

Key insights

• SMBs face distinct HR challenges due to lean teams, limited budgets, and expanding compliance demands
• Strong leadership development, intentional culture-building, and structured change management are critical for growth
• Career development in flat organizations requires creative approaches like skill-building and cross-functional projects
• Equipping managers with the right tools, training, and HR tech reduces risk and supports consistency at scale
• Proactive people strategies help SMBs stay competitive, boost retention, and create enterprise-level employee experiences

Why small businesses face unique HR challenges

Small businesses employ nearly half of the private workforce but typically operate with higher HR-to-employee ratios than enterprises. 

Some of the unique HR challenges that SMBs face include:

• Limited resources and budget constraints: SMBs typically allocate much less revenue to HR functions compared to larger companies
• Lack of dedicated HR expertise: Many SMBs rely on office managers or operations staff to handle HR responsibilities without formal training
• Face-offs with larger companies for talent: SMBs have to compete with enterprises that can offer higher salaries, comprehensive benefits, and established career paths
• Scaling HR processes alongside business growth: Manual processes that work for an SMB of 20 people become unsustainable when the team reaches 100 people without proper systems

The good news is SMBs also have advantages to help balance these difficulties. They have greater agility, closer relationships between leadership and teams, and the ability to implement changes quickly without bureaucratic delays.

Common HR challenges for SMBs

From career development support to compliance policy maintenance and conflict management, these are the most common HR challenges for SMBs, plus steps you can take to overcome them.

1. Investing in leadership and management development

Most SMB managers rise through technical expertise rather than leadership training, creating a skills gap that affects entire teams. A software developer becomes a team lead, or a top salesperson becomes a sales manager—sometimes without any formal management preparation. 

This can lead to challenges navigating leadership responsibilities effectively, such as delegation, conflict resolution, performance conversations, and team motivation.

Solutions:

• Implement mentorship programs that pair new managers with experienced leaders, either internally or through industry networks. Create structured monthly meetings focused on real challenges and practical skill development.
• Create accessible microlearning opportunities using learning and development platforms that deliver 10-15 minute leadership lessons during lunch breaks or commute times. Focus on immediately applicable skills like giving feedback, running effective meetings, and managing difficult conversations.
• Establish clear leadership competencies that define what good management looks like in your organization. Include both technical skills and soft skills like communication, empathy, and strategic thinking. 
• Use regular feedback loops through quarterly 360-degree reviews where team members, peers, and supervisors provide input on leadership effectiveness. Mona Andrew, Forbes Council Member, explains:  “Quality feedback from others provides an external perspective on my actions, decisions, and behaviors and can significantly enhance self-awareness and personal growth.” These insights help leaders refine their strategies, build empathy, and stay aligned with their teams.

2. Building a strong organizational culture

Culture development becomes increasingly complex as SMBs grow beyond the founder’s direct influence and personal relationships. What once felt natural and organic now requires intentional effort and systematic approaches—especially since 83 percent of workers globally who describe their company’s culture as “good” or “excellent” say they’re highly motivated to do their best work.

As Michael McCarthy, instructor at Harvard DCE Professional & Executive Development, explains, “Workplace culture is not just about sticking a list of values on a wall in the break room and then going about your day. It’s a commitment that every person in the organization, including senior leadership, will model their behavior to support those values.”

Remote and hybrid work models add another layer of complexity, making it harder to maintain the close-knit feeling that many SMBs value.

Solutions:

• Document and communicate core values consistently through hiring processes, performance reviews, and daily decision-making. Create specific behavioral examples that show how values translate into actions.
• Create structured onboarding that emphasizes culture from day one with culture buddies, values-based training modules, and leadership storytelling sessions that reinforce what makes your organization unique. This early focus pays off: Organizations with strong onboarding programs can improve new-hire retention by up to 82 percent.
• Implement recognition programs that reinforce desired behaviors using peer-to-peer recognition platforms, monthly culture awards, and public celebration of value-driven actions during team meetings.
• Facilitate regular team-building activities that work across different work arrangements. Try virtual coffee chats, in-person quarterly gatherings, cross-functional project teams, or volunteer opportunities that align with company values.

3. Adopting strong change management practices

SMBs experience constant change due to rapid growth, market pivots, new technology implementations, and evolving customer demands, but most lack formal change management models. When leaders don’t communicate change clearly or offer adequate support, this can lead to change fatigue and resistance among team members. 

A multi-national study in 2023 shows that leaders who adopt data-driven change practices increase their success rate by 23 percent—reinforcing that effective change isn’t about moving fast. Rather, it’s about being strategic with clear communication and measured implementation 

Solutions:

• Communicate the “why” behind changes clearly and consistently through multiple channels—all-hands meetings, written updates, team discussions, and one-on-one meetings that address individual concerns and questions
• Involve team members in the planning process by creating change advisory groups, conducting impact assessments with affected teams, and incorporating feedback into implementation plans before rollout
• Break large changes into manageable phases with clear milestones, success metrics, and celebration points that help people see progress and build momentum throughout the transition
• Provide necessary training and resources through hands-on workshops, documentation, peer support systems, and dedicated help channels that ensure people feel confident navigating new processes or systems

4. Supporting their people’s career development and performance

In 2024, leadership development and succession planning rose from the sixth to the second most pressing challenge among employers. SMBs in particular often struggle to provide clear career pathing due to flatter organizational structures and limited role diversity. Traditional career ladders don’t always apply in smaller companies, where there may be only one marketing manager or finance director. 

Given that almost 70 percent of U.S. professionals want to advance through company-provided learning and development, it’s crucial that HR leaders play a role in shaping alternative development paths—supporting team members in seeing a future within the company. As Jorge Titinger, founder and CEO of Titinger Consulting, puts it, “attracting talent that fits the culture of your company and providing continuous development opportunities […] helps build a motivated and skilled workforce.”

Solutions:

• Create flexible career frameworks that emphasize skill development, project leadership, and cross-functional expertise. Define multiple paths for growth within existing roles.
• Implement regular performance conversations focused on growth. Set monthly check-ins to explore interests, strengths, development goals, and potential stretch assignments that align with business needs.
• Provide cross-functional opportunities through project teams, job rotation programs, committee leadership roles, and mentoring assignments that build diverse skills and expand professional networks.
• Offer targeted learning opportunities aligned with both individual goals and business priorities. These might include industry events, certification programs relevant to their role, internal knowledge sharing sessions led by team members, and online courses and skill-building platforms.

5. Assigning HR tasks to managers with limited HR knowledge and training

Some SMB managers take on HR responsibilities without formal training, which can lead to compliance risks and inconsistent experiences for their people. This setup can overwhelm small teams, especially as headcount grows and manual processes start to break down. 

Without support, even well-meaning managers can make costly missteps—like asking the wrong interview questions, applying policies inconsistently, or failing to document key decisions. These gaps can increase legal risk and damage trust across the organization.

Solutions:

• Create simple, accessible HR guides and templates that provide step-by-step instructions for common situations like performance conversations, disciplinary actions, accommodation requests, and termination procedures, with clear legal guidelines
• Implement HR tech for SMBs to automate and standardize processes, using platforms that guide managers through proper procedures, ensure consistent documentation, and provide real-time compliance alerts for potential problems
• Provide targeted training on high-risk areas through quarterly workshops covering employment law basics, interview techniques, performance management, and workplace investigations
• Consider HR outsourcing or fractional HR support for specialized needs like policy development, complex investigations, benefits administration, and legal compliance reviews that require expert knowledge

6. Maintaining effective compliance policies and processes

It can be challenging to keep pace with evolving employment laws and regulations, particularly when operating across multiple jurisdictions. What starts as simple state compliance becomes complex when you have remote team members in different locations or expand to new markets. 

Still, only 23 percent of U.S. organizations in 2023 said their compliance-related processes are automated and part of an integrated system. This gap means small HR teams often spend valuable time tracking legal changes manually or managing scattered documents, increasing the risk of errors and missed updates.

Solutions:

• Create a centralized system for tracking regulatory changes using legal update services, HR compliance platforms, and industry associations that provide regular updates on employment law changes affecting your locations and industry
• Develop standardized processes for policy updates and communication with regular review cycles, legal review requirements, acknowledgment tracking, and training programs to ensure all team members understand current policies
• Conduct regular compliance audits and risk assessments covering pay practices, classification problems, safety requirements, and record-keeping standards, with corrective action plans for identified gaps
• Leverage technology to automate compliance-related tasks, including time tracking and overtime calculations, break monitoring, required training completion tracking, and audit trails that demonstrate good-faith compliance efforts

7. Managing conflict and issues proactively

Small businesses often lack formal conflict management processes, hoping that close relationships and open communication will prevent serious problems. While this approach works in very small teams, it becomes inadequate as organizations grow and relationships become more complex.

Unresolved workplace conflicts cost organizations significant time per week per person in lost productivity, with 80 percent of U.S. workers at risk of burnout, making proactive conflict management a business necessity rather than just a people concern.

Solutions:

• Establish clear communication channels for raising concerns through multiple avenues. These channels might include direct supervisor conversations, HR representatives, anonymous reporting systems, and peer mediation programs that encourage early intervention.
• Train managers on conflict resolution techniques, including active listening skills, de-escalation strategies, mediation approaches, and when to involve HR or external resources for complex situations.
• Implement a structured approach to documenting and addressing concerns with standardized forms, investigation procedures, resolution timelines, and follow-up protocols that ensure consistent and fair treatment.
• Create a psychologically safe environment where feedback is welcomed through regular team check-ins, anonymous surveys, open-door policies, and leadership modeling that demonstrates how to handle disagreements constructively.

Help your small business overcome HR challenges

Addressing these HR challenges for SMBs proactively transforms them from obstacles into competitive advantages. SMBs that invest in strong people practices see higher engagement, lower turnover, and faster growth than those that treat HR as an afterthought.

The key lies in recognizing that you don’t need enterprise-scale resources to create enterprise-quality experiences for your people. With the right combination of strategic thinking, practical solutions, and modern technology, SMBs can build people practices that rival much larger organizations.

Start with the challenges that have the biggest impact on your business, implement solutions systematically, and measure results to demonstrate the value of prioritizing your people.

FAQs on HR challenges for SMBs

How is HR in small businesses different from large companies?

Small business HR professionals typically function as generalists who handle everything from recruitment to compliance to employee relations and benefits administration—often as a team of one. They also work with significantly tighter budgets and fewer technological resources than large companies while competing for the same talent.

Despite these challenges, small HR departments come with plenty of benefits, including greater agility, closer relationships between leadership and teams, and the ability to make changes quickly without being delayed by red tape.

What is the best HR system for small businesses?

The best HR software for small businesses is one that centralizes HR data management, people analytics, and performance management tools in one platform. Small businesses can use software to manage every aspect of the employee lifecycle, from recruitment to retirement.

How do you effectively manage HR in a small business?

Best practices for managing HR in a small business include:

• Establishing clear, documented policies and procedures that scale with your growth
• Prioritizing legal compliance by using regular policy reviews to stay current with employment laws
• Developing a consistent communication framework that keeps your people informed about policies and expectations
• Building a positive workplace culture by intentionally defining and reinforcing your values in day-to-day operations
• Creating structured processes for performance management with regular feedback cycles
• Investing in user-friendly HR software that automates administrative tasks like time tracking, onboarding, and benefits administration

Putting these best practices into place gives your HR team more time to focus on people initiatives that drive business growth.