September 5, 2022 | Last Updated on: January 31, 2023
In this article:
The Bureau of Economic Analysis defines a recession as a “marked slippage in economic activity.” In other words, a recession occurs when there is no growth in the economy over an extended period of time. Indications of a recession may include a declining stock market and rising unemployment statistics, both of which are bad for any business. While it is impossible to predict exactly when it is coming or why it is happening, small business owners can take action to preserve their business through the effects of a recession.
Economists struggle to predict when or why a recession will hit. Typically, recessions have begun following a peak, or high period, of economic growth. As activity in the economy, like investment activity and the real estate market, rises quickly interest rates are increased as a strategy to control the rising prices. Higher interest rates create economic strain for unprepared individuals and business owners and act as contributors to rapid fluctuations in spending and may even affect global policies, like trade. For example, The Great Recession began at the end of 2007 and lasted through the middle of 2009. It is noted as one of the longest and most severe recessions of all time, measured by a significant decrease in the real gross domestic product (GDP) and an increase in the unemployment rate. It was caused by deregulation, sub-prime mortgages, a housing bubble, and poor choices on Wall Street. The great recession had a memorable impact on American households because the drop in real estate values and the crashing stock market caused the net worth of American households to decrease from $69 trillion to $55 trillion in the two years.
The possibility of recession is on many entrepreneurs’ minds today because of the daily battle with inflation. The U.S. inflation rate was recorded as 9.1% in June of 2022, which is the highest noted inflation rate since 1980. The rise in inflation is contributing to a public fear that the next recession is here, or right around the corner. According to a survey conducted by Digital.com, 65% of small business owners in the United States are concerned that they may need to close their businesses if the inflation rate continues to rise. The survey also revealed that many small business owners that employ 500 or fewer people have already experienced negative impacts from serious supply chain issues stemming from the pandemic. Some have had to lay off staff, shut their doors, or completely redesign their business plans.
A recession can also directly affect small business owners in the following ways:
As inflation rates rise and interest rates skyrocket, consumers start to change their spending habits. The fears of unemployment, homelessness, and diminished savings and retirement accounts create a need for households to reexamine their finances. Individuals start to put off large purchases, like equipment, real estate, home goods, and vehicles. To prepare for the unknown, customers start to compare prices, and lower costs begin to be more of a priority than preference or loyalty, which can hurt the small businesses that have serviced those customers in previous years.
During a recession, small business owners may experience a decrease in monthly cash flows because of accounts receivable collection issues, increased supply costs, and lost revenues. Since cash flow and annual revenues factor into calculating personal credit scores and affect business credit history, small business owners may experience trouble paying off current debts or securing new financing options.
When facing a recession, small business owners are forced to make some tough decisions. Most entrepreneurs try to avoid layoffs for long-time employees, but the recession may make it inevitable. They may also need to sever ties with suppliers to explore more cost-effective options or postpone expansion plans which can create conflict and add stress to other areas of operations. The increased pressure on business owners can have a negative impact on the overall operational and financial health of the organization.
While there is no guaranteed way to combat the effects of inflation and a potential recession, there are ways small business owners can prepare for difficult financial times.
Examining the money that is going out of your organization is one of the best ways to prepare for tough times. Small business owners are often surprised to learn that there are many ordinary business expenses that can be cut during a recession. Consider reviewing the following cost outflows in your business.
Covid-19 changed a lot of business models when it comes to location. Many business owners that were leasing or renting office space or storefronts made the shift to remote work and mobile services. Businesses were able to continue operations without a physical location, which helped entrepreneurs consider a remote operation long-term. To prepare for a financial crisis, consider making your business remote to save on real estate costs.
Inventory makes up a large portion of a retail business’s expenses. During a recession, consider cutting back on the inventory you keep on hand. Your business may be able to carry fewer in-store items which will cut down on current costs for new products and save money on storage space.
Traveling for business is necessary when meeting with clients, securing supplier relationships, or performing the duties of the company. However, some or all the travel associated with operations can be eliminated. To reduce operating expenses, consider decreasing or temporarily stopping business travel. Most business needs can be met through a virtual meeting, using technology available through subscriptions like Zoom, or a conference call.
As supply chain issues and rising costs create stress for small businesses, consider reviewing current vendor contracts. If your business is feeling the effects of decreasing economic activity, it is likely that your vendors are having similar issues. Work with your current vendors to amend service contracts and renegotiate prices. If new terms can’t be arranged, consider alternative supply sources, like Amazon or local vendors.
The costs of marketing and advertising can take up a significant portion of a small business budget. While facing the threat of a recession, review marketing expenses and look for opportunities to decrease the overall expense. Performing more advertising in-house through email campaigns or social media engagement is a cost-effective way to get the word out about your business. Turning to independent contractors or freelancers may also be an efficient way to reduce your marketing budget.
Small businesses are an important part of creating communities, and even in tough times, the public shows support for small business owners. Communicate your staffing circumstances, economic situation, and business needs, and share your evolving business ideas with your customers. The extra effort may make a big difference in future income by retaining existing customers and establishing relationships with new customers.
It may seem counter-productive to your business strategy to increase your prices during tough times, but it may be just the change your small business needs to survive and thrive in a financially tough economy. Review your current operations and revenue streams. Do you sell products or provide services? Is there room for price increases? The answers to those questions may be as simple as noting when the last change in prices occurred or it may require calculating what percentage of increase your customers can tolerate. Starting with a small increase or only increasing a few prices may be an effective way to monitor the effect the change will have on your bottom line.
It is possible for your small business to do better during and after a recession, but the fear of the unknown can make success seem out of reach. There are ways to help your business survive and even see an increase in revenues during or immediately following a big change in economic activity. If you’re wondering where you can turn for help, consider the following sources.
Some small business owners are experiencing relief after reaching out to local members of Congress. Writing letters, making calls, and attending conferences has given many small business leaders the initiative to express their concerns and encourage lawmakers to change the policies that affect small businesses. Events like the Goldman Sachs 10,000 Small Business Summit that took place in Washington D.C. last month allowed entrepreneurs and seasoned professionals to advocate for solutions to combat inflation. Small business owners are also asking that authority of the U.S. Small Business Administration be reinstated.
The effects of a recession on small businesses may include cash flow concerns and difficulties paying back small business loans and other business debts. However, even during a recession, there are financing options available for small business owners.
To manage fluctuating cash flows or decreased revenues due to increased expenses or interruptions in operations, consider working with a small business lending expert to secure a business loan and rebuild cash reserves. The following types of financing options can provide relief from decreasing cash flows:
If the threat of an economic recession is giving you reasons to be concerned about your ability to pay back loans or make mortgage payments, it may be beneficial to explore refinancing options. Business loans and credit card debt can be refinanced by taking out a new loan with the same lender or by using different lenders. Refinancing will replace the repayment terms of your original debts with new terms that may offer lower monthly payments, better interest rates, or even allow you receive a lump sum of funds based on equity.
There is no surefire way to recession-proof your small business, but you can prepare for a potential economic downturn by reducing expenses, strengthening customer relationships, and increasing prices. If you are concerned about the effects of a potential recession on your business, consider reaching out to Congress or working with Biz2Credit to explore financing options. The lending advisors at Biz2Credit were able to help a Wisconsin gas station owner increase their cash flow with a line of credit, and they may be just the solution you’ve been searching for.
