(Reuters) - Small business continued to recover last year from the hit they took for the pandemic while facing financial challenges tied to higher interest rates and still hard-to-find workers, according to a report released Thursday by the 12 regional Federal Reserve banks.

"A majority of firms said that higher interest rates were affecting their business in some way, most often in the form of increased debt payments," according to the latest Small Business Credit Survey, with it adding "firms experienced challenges with rising costs and paying operating expenses in the year leading up to the survey."

The report, released by the Cleveland Fed, was based on a survey of just over 6,000 firms with fewer than 500 employees, conducted between September and November last year. The survey horizon captured firms' sentiments in the wake of what had been a very aggressive campaign of central bank rate rises aimed at cooling inflation.

Those actions lifted the central bank's target rate range from near zero levels in the spring of 2022 to the current setting of between 5.25% and 5.5% with the July hike. With inflation pressures easing, the Fed is almost certainly done with rate increases and is eyeing cuts this year, although it's unclear when that might start and how far the Fed will go.

That outlook suggests that some of the financial and inflation pressures small firms faced last year will probably ease over time. The report noted, "firms were much more likely to expect increases than decreases in revenue and employment in the coming year, though they were more optimistic pre-pandemic."

The report found that almost all responding firms faced financial challenges last year, with the most common issue being tied to rising costs for goods and services as well as higher wages. That said, some 77% of firms flagged rising costs as a problem, which was down from 81% who said the same thing in 2022.

In terms of debt, the report found that last year the share of small businesses with outstanding debt held steady, but those who borrowed had more debt to manage. The report said 39% of firms had more than $100,000 in outstanding debt, up from 31% who were in the same position in 2019.

The report also said 34% of respondents said making debt payments was a challenge and 54% of firms tied higher rates to increased debt costs.