Should You Take a Business Loan Out Before a Recession
August 23, 2022 | Last Updated on: February 1, 2023
August 23, 2022 | Last Updated on: February 1, 2023
Taking a business loan before a recession requires that you consider more than just repayment options. Know everything you need, plus a few tips to ensure your small business is recession-proof!
Economists say that a recession is a natural phenomenon in economics, as the economy can’t stay in an uptrend forever. While that might be true, many fail to consider the repercussions it brings for small business owners whose number one concern should be to make their small business thrive.
As a small business owner, you’ve probably been through the 2008 financial crisis and have the difficulties of that time still freshly engraved on your mind. If you’re concerned about the talks of a possible coming recession, it’s ok to feel worried, as it can affect your small business tremendously. But you’re number one priority should always be keeping your small business healthy.
With it, having a sustainable cash flow or working capital can make or break a small business. If a recession does come, it will also not last forever, and the small businesses that thrived are the ones who made the boldest decisions.
Getting a business loan before a recession can be one of those bold decisions that can make your small business thrive. But before that, as a small business owner, there’s more to consider, not just acquiring a loan. In this article, you’ll learn some tips to prepare your small business for an eventual recession.
According to Investopedia, the definition of an economic recession is when a country suffers two consecutive quarters of decline in its gross domestic product (GDP). A recession typically produces declines in production output, consumer demand and confidence, employment, and lower interest rates as the Federal Reserve tries to jumpstart the economy by convincing borrowers to take loans.
Putting it simply, a recession happens because a country’s economy cannot stay in an uptrend forever. The economy works in periods of expansion and contraction. As people borrow more money, and as the stock market and real estate market continue to gain more value, the bubble eventually pops. In the long run, that’s what maintains those markets and the economy stable.
Small businesses are the ones that get affected the most. As a small business owner, when a recession hits, you start to see a slowdown in your product or service consumption and a more strained cash flow that can lead to trimming costs, which might mean cutting staff. Also, you’ll find it harder to acquire business funding due to the cuts in interest rates.
Unlike large businesses that can rely on investment and a publicly traded stock, small businesses can only rely on themselves. Lenders know that, which means they’re likely less enthusiastic about lending them money. All in all, small businesses fare the worse in any crisis. For example, more than 400,000 small businesses closed during the pandemic.
Although nothing’s for certain, there’s a high probability the U.S. economy will face a recession by the end of 2022 or the beginning of 2023. Economists point out the two consecutive negative GDP quarters as an indication of such.
But we might see a change in the coming months as the Federal Reserve tries to stagnate the negative GDP growth with a rise in interest rates to combat inflation.
As a small business owner, it’s important to know a bit about the economics behind a recession, as you’ve seen above. But still, although small businesses are the ones that suffer the most during recessions, the ones that fail are those who didn’t properly prepare for such.
To help the U.S economy — and yourself — it’s essential you prepare your small business to wither the storm. Let’s have a look at some steps you can take to make your small business recession-proof before deciding to apply for a loan. There’s more that comes to it other than business financing.
Taking a look at what you offer before a potential recession can make all the difference to your small business. As an example, if you offer products with elastic demand such as luxury items or any non-essential goods, it’s a good idea to think about how you can maintain a healthy demand for that product — and you’ll get a few ideas in a moment.
For a product with inelastic demand — groceries, fuel, etc. — it doesn’t mean you can sit back and let the recession blow over. You must keep an eye out for your supply chain, competition and consumers’ confidence, etc. It’s better to get to know the possible problems and think of solutions before the recession hits, as it all most likely will become much more difficult during one.
Keeping with the thought of the step above, it’s a good idea to look at your product’s supply and demand situation and develop a business plan around it, as well as take into account other parts that are crucial to your small business during an economic downturn.
Your plan should take into account the current situation of your small business and make an educated guess as to how it might perform during a recession. Look at the current level of demand and think about how you can improve it, keep tabs on your supply chain and cash flow, calculate how much you should stock your inventory, etc.
You must also plan for the event that your small business can be hit on the revenue stream quite severely. Plan for an emergency fund — a business line of credit could be a great solution to tap into if your business suffers a downturn. Keep your current debts as low as possible (including personal loans and credit card payments), And as a last resort, consider the layoff of some staff. But this step also has major disadvantages, as you’ll potentially lose valuable and skilled staff members that can be essential when the economic activity starts picking up steam again.
Although keeping spending to a minimum is advisable, some surgical investments can make a difference in your small business when heading for a potential recession.
Here are a few examples of smart investments you can make to prepare your business.
Getting a business loan before a recession still has a few steps a small business owner must take into account. With an economic recession, lenders tend to take business lending more seriously, and it’s substantially harder to apply for a business loan.
As the crunch of an economic downturn starts, small business owners might see their financing options significantly reduced. While it’s still possible to acquire a bank term loan or an SBA 7 loan, you will have a significantly harder time due to the interest rates being unfavorable to lenders.
Taking a business loan before a recession should be taken very seriously. As a small business owner, you must ask yourself how will the repayment terms affect your business. And if you choose not to acquire a business loan, you must calculate how your credit score will impact a financing option if you need one later on. You need to have a clear-cut business plan for any of those choices, and how you’ll achieve your monthly payments. If you choose to pass on a business loan, you must think of ways to acquire capital later on if you end up needing it.
Financial institutions and the U.S. small business administration tend to tighten their belts during an economic recession, or if they fear one is on the horizon.
While you might have a harder time qualifying for a loan from a traditional institution, acquiring essential capital during a crucial time is not impossible. You can opt for alternative lenders like an online lender.
In the case of Biz2Credit, we can offer you numerous ways to help your business survive and thrive in an economic downturn. We also know that many small business owners might struggle with cash flow, so we can work with you to offer the best repayment terms possible with the smoothest monthly payments you can achieve.
An injection of capital before a recession hits can be vital for your small business. Several possibilities can come from an economic downturn, be it a drop in demand and eventual cash flow to the ability to resupply your stock.
Let’s look at a few examples of what a business funding option can bring to your small business:
If you’re concerned about a coming recession — or if you’re reading this during it — a small business loan will not be a problem for you at Biz2Credit. You might be worried about the state of your small business, but Biz2Credit will take the worry of acquiring capital out of your mind!
All you need is to take 4 minutes of your time to apply for a loan and hear from us within 24 hours. You’ll get to know the best financing option for the current state of your small business with the best repayment terms possible for you, with no strings attached! Just get to know the terms and if they will suit your small business.
As Troy Binns, owner of Binns Martial Arts was seeing his small business struggle during the pandemic, he reached out toBiz2Credit and we offered him a solution. Thanks to it, he was able to maintain his business running until today! Do the same as Troy, and don’t hesitate to contact our team with any questions you might have!