Small Business Confidence Is Up, What Does that Mean?

[Editor’s note: This is a blog post from Noah Breslow, CEO of OnDeck Capital. OnDeck Capital is a bronze sponsor at LendIt Fintech USA 2018, which will take place on April 9-11, 2018 in San Francisco.]

The year 2017 saw small business owners across the United States grow more optimistic about the future than they’ve ever been—at least since the creation of the Optimism Index by the NFIB in the 70s.  “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index,” said NFIB President and CEO Juanita Duggan.  “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.”

The NFIB’s Chief Economist, Bill Dunkelberg added, “We’ve been doing this research for nearly half a century, longer than anyone else, and I’ve never seen anything like 2017.”  He continued, “Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

So, what to expect for 2018?  The index suggests that small business owners are ready to dial investment up in a big way in 2018.

Will this Impact Small Business Growth in 2018?

I believe this optimism is great for small businesses, but it’s only part of the equation. From an economic perspective, there may be even more good news in store this year.

Most economists describe a GDP growth rate of between two to three percent as the “sweet spot” for the U.S. economy.  Kimberly Amadeo, of TheBalance.com, describes it as a Goldilocks Economy, “…when growth isn’t too hot, causing inflation, nor too cold, creating a recession. It [a Goldilocks Economy] has an ideal growth rate of between 2-3 percent, as measured by GDP growth…”

If that GDP growth is realized, 2018 should be a great year for small businesses. And the possibility exists that forecast will continue to be good through at least 2020.

David Payne, a staff economist for the Kiplinger Report, is predicting that GDP growth should bump up to 2.9 percent in 2018 and suggests the 2.6 percent growth rate for the last quarter of 2017 was “a lot stronger than it looks.”

“Consumers, businesses and even government picked up the spending pace,” he writes. “Consumers spent heavily in nearly all categories.”

With consumer spending surging, small businesses have a real incentive to expand, hire employees, and invest in key areas, thereby helping strengthen our local business communities. When consumers are confident and willing to spend and businesses are optimistic and willing to invest in growth, it’s the kind of environment that encourages job creation – we could see the US unemployment rate drop as low as 3.9 percent in 2018.

As a result of such low unemployment, employers will likely see wage pressure increase, which is obviously good for the workers, but might not be as good for employers—at least in the short term. Nevertheless, overall wage growth would increase consumer discretionary income, which will fuel spending at many types of small businesses. This environment and its potential for growth isn’t lost on our small business owners.

The Tax Bill Could be a Boon for Small Businesses

Sole proprietorships, partnerships, and S corporations are all examples of what are called pass-through businesses; and make up roughly 95 percent of all U.S. businesses. They also happen to be many of our customers at OnDeck, and other online small business lenders. One of the main components of the new tax bill is a 20 percent tax deduction for those businesses, where business owners can “shield” 20 percent of their business income from flowing through to their personal income tax returns.

While there are some exceptions to the 20 percent tax deduction, what we are looking at is the majority of small business owners receiving a sizable benefit.  We think it is highly likely that business owners will reinvest some of that extra capital back into their businesses.

I’m not an economist, but with so many policy changes benefiting small businesses, including lowering the corporate tax rate, rule changes regarding how small businesses depreciate equipment and other assets, the deduction for pass-through businesses, and others, it is almost a perfect storm for small business investment and growth.

What Does this Mean for Small Business Lending?

The short answer is, I’m encouraged.

After loaning more than $8 Billion in capital to small business owners over the last 10 years, I’m more optimistic than ever about the future of online small business lending, the future of small businesses, and the strength of our economy. We have not seen an environment like this at any time in the decade we have been lending; and with business owner optimism at an all-time high, a growing economy, and strong consumer confidence, it might make more sense than ever for small businesses to borrow capital to fuel growth and increase ROI.

At OnDeck, and for online small business lending generally, we are looking forward to a very strong 2018.

Noah Breslow, CEO – OnDeck Capital

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