Businesses are gearing up for growth

With the economy improving, firms get set to hire talent and invest in information technology.

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Evan Stein may be one of the best divining rods out there if you are searching for insight about the likely path of the small business economy in 2014. Mr. Stein, the owner of an IT sales-and-service franchise, CMIT Solutions of Grand Central and Wall Street, has been talking to his small business clients about their spending plans for next year.

Budgets are up, and “pretty much everybody I talk to is planning to hire one or two more employees,” he said.

Many of the firms—in architecture, law and finance—are finally biting the bullet on delayed IT expenditures. Microsoft is ending support for its XP operating system in April, and a full 25% of Mr. Stein’s client base still uses old XP machines. “I expect a big uptick in February and March,” he said. One of his clients just spent $500,000, financed over five years, to buy 10 computers, a new server and new networking equipment.

Like CMIT and its clients, many small businesses are preparing cautiously for a year of economic growth, a slowly rising tide of consumer confidence and the tenure of a new mayor who has promised some relief from city regulations. They’ll also have to contend with the continuing rollout of the Affordable Care Act and changes in the health care market, as well as a crackdown on labor practices and a radically changing marketing landscape.

Gearing up for growth

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Here are six trends likely to affect small businesses in 2014, for better or worse:

The economy will continue to improve, boosting small businesses. The city added 110,000 jobs between November 2012 and November 2013. The national economy is expected to improve in 2014, which should help the local economy. “The city is on track to post its third straight year of 2%-plus growth in private-sector jobs,” wrote James Brown, a labor market analyst for the New York State Department of Labor, in an email. “The only better period was four straight years between 1997 and 2000. This current growth was achieved even though the city’s large financial sector has been basically treading water the last two years and is not expected to improve significantly in 2014.”

The key drivers in 2014: technology, tourism, health care and education. The city’s growth will continue outpacing that of surrounding areas, too. According to the Federal Reserve Bank of New York’s recently released index of coincident economic indicators, the city’s economy in November expanded at a healthy pace—faster than those of the state and New Jersey.

Credit will be easier to get. Midway through 2013, the Federal Reserve Bank of New York released a survey that found that for 49% of 800 businesses, access to capital was a barrier to growth. By the end of the year, credit markets were showing signs of improvement. Loan approval rates by big banks and alternative lenders, including nonprofits, had jumped to 17.6% from 14.9%, and to 67.3% from 63.8%, respectively, from -December 2012 to December 2013, according to the Biz2Credit Small Business Lending Index.

Rohit Arora, chief executive of Manhattan-based Biz2Credit, an online loan broker, said he expects the credit markets to continue to improve, especially when it comes to small loans and lines of credit. The big banks are still distracted by regulatory concerns stemming from the Dodd-Frank financial-services reform legislation, but other entities are moving into the spaces where the big banks don’t want to tread. New players include nonprofits, short-term lenders, crowdfunders and technology firms. Interest rates may be higher, but financing is available.

The new mayor will advocate for businesses but faces big hurdles. Bill de Blasio proposed a five-point plan to prevent the city from abusing its regulatory power. He’s talking the talk, but most mayors pay at least lip service to lightening the regulatory load on small businesses. “We’re hopeful, based on his record as public advocate,” said Victor Wong, director of GoBizNYC, a small business initiative spearheaded by the Partnership for New York City.

However, the city relies on revenue from fines, projecting $293 million in fine revenue not related to parking in 2014, down from $320 million in 2013. Most fines actually lose money for the city when enforcement costs are included, according to a report by the Independent Budget Office, but the flow of money supports thousands of city workers.

One regulation already scheduled to go into effect: In April, if a business has 20 or more workers, it must offer at least five paid sick days. The provision is likely to be expanded on Oct. 15, 2015, to companies with 15 or more workers.

Federal changes, including the ACA and increased wage-and-hour enforcement, will affect the labor markets. The markets for individual and small business health insurance are closely linked. The requirement for individuals to purchase coverage may create more demand by workers for their small business employers to provide more and better insurance, said Beth Alcalde, a West Palm Beach, Fla.-based partner at law firm Akerman, which has a New York City office.

Many small businesses will spend hundreds of hours figuring out what to do in response to the changes in the individual market and the arrival, on Jan. 1, 2015, of the mandate that all businesses with more than 50 employees provide insurance or face penalties that could reach into the tens of thousands of dollars. One thing to keep an eye on this year: regulations expected to clarify whether employees at associated businesses will count toward the 50-employee trigger.

Meanwhile, small companies should be on the lookout for more aggressive agency enforcement of wage-and-hour laws. “We’ve heard anecdotally about a lot more on-site audits from city and federal inspectors. What they’re looking for is off-the-clock work and unpaid interns. It’s seen as a revenue generator,” said Matt Steinberg, a New York-based partner at Akerman.

Energy prices will rise. Prices for energy are expected to increase at faster than the rate of inflation in 2014; the U.S. Energy Information Administration predicts underlying commodity prices will rise by 2.1% for electricity and natural gas. Consolidated Edison, which had applied for rate increases on the distribution of electricity and natural gas, agreed just before the year’s end to freeze rates. But long-awaited (or long-dreaded) federal greenhouse-gas regulations may have an effect this year, almost certainly driving prices up further.

“The rules regulate electricity producers, especially those that use coal. Rates almost have to go up,” said Dan Bosch, manager of regulatory policy for the National Federation of Independent Business.

The U.S. Supreme Court is scheduled to issue a decision by July on whether the rules are valid. Rising power prices are bad news in New York. Prices statewide are the second highest in the nation for electricity and 19th highest for natural gas, according to the Energy Information Administration.

The marketing landscape will continue shifting. The first sign of renewed confidence among small businesses is a bigger marketing commitment. But small business owners emerging from survival mode may be stunned by the changes to the marketing landscape. Smart marketers target clients where they are, which increasingly means reaching them on smartphones and tablets. By 2016, tablet sales will overtake the sales of desktop and laptop PCs, according to Forrester Research, which does research and analysis on IT firms.

The new landscape requires investments in websites that can adapt to mobile phones, and almost every small business owner needs at least a passing familiarity with marketing on Facebook, Twitter and Pinterest, the fastest-growing large social–media platform.

Along with online marketing, especially mobile, events may be another key trend in 2014. Mr. Stein of CMIT is already planning to devote about 5% of his $1 million in revenue to marketing, including workshops for small business owners to help them translate tech-speak. “We’ll be helping owners bridge the gap between what the technology is and how it applies to their business,” he said. “We want to give owners the tools to have conversations with their IT people.”

View this story at Crain’s New York Business site here.