In this article we cover:
Economists generally define a recession as a fall in GDP in two successive quarters. Recessions impact all businesses, but small businesses can get hit particularly hard. Small businesses are more sensitive to cash flow challenges while large corporations typically have vast cash reserves to soften the blow. Customers (who are also adjusting to a recession) might delay payments or purchases which can impact the ability of a small business to operate. When a recession hits, small business owners should take quick action to shore up their cash flow to protect their business. Having a plan in place before a recession hits is key.
How a recession can impact a small business
When a recession hits, both businesses and individual consumers cut back on spending. This means cash flow that a small business is counting on to operate might suddenly dry up until the recession is over and regular spending resumes. If a small business is not prepared to adjust, they risk being unable to operate.
Small businesses typically operate on cash flow and don’t yet have large cash reserves. If an economic downturn strikes, even the most loyal customers might be late on a payment, or abruptly cancel service which puts the business in a challenging situation. This can set a chain of events in motion because now the small business can’t make its payments to its vendors to operate.
The type of business also plays a factor in how hard a recession bites. For example, businesses and individual consumers typically cut spending on luxury goods and services first in favor of the essentials.
Ways a small business can cut expenses during a recession
Having a cost-cutting plan in place before a recession happens is crucial. At the very least, think through how you would cut costs in a recession if cash flows suddenly dried up. Having several cash flow forecasts in place is a sound business strategy because it forces you to think through multiple scenarios based on how bad the recession is. Below is a list of ways small businesses can cut expenses during a recession. Consider how each might apply to your business:
- Staffing Reductions: Salaries are typically the highest expense contributor for a small business. This is not ideal because people will lose their jobs, but layoffs might be essential to keep a small business afloat. When the recession is over and business picks up again, consider having a percentage of your staff as independent contractors and/or vendors. This will make your workforce more flexible and allow you to scale up or scale down without having to cut critical staff members during a recession. You will also save on employee benefits. For more information on employee benefits, visit our article How to Offer Your Employees Health Insurance as a Small Business Owner. This is also an opportunity to review all of the work that your staff is doing. Are there opportunities to automate some of their labor? Are there opportunities for the business operator to do some of their work?
- Reduce marketing spend: We all know that overused saying, “You must spend money to make money.” While that might be true, during a recession you can cut your marketing spend to reduce expenses. A lot of marketing work can be done by the small business operator. While you might have to cut ad spend, there are a lot of valuable, demand-generating marketing activities that can be done like social media. Platforms like LinkedIn or Meta’s suite of apps which include Facebook and Instagram, can be critical tools to help your small business save money and thrive during a recession.
- Review your vendors: During a slowdown, take a critical look at your vendors and what you are spending with each. Which vendors can you put on pause, which should you look to replace in an effort to find better pricing, or which can be cut altogether? The goal is to be able to continue to operate with just the essentials.
- Review your office space: If you are paying for office space you can consider going 100% remote or joining a co-working space to save on real estate costs. A subscription to Zoom is going to be much more cost-effective than an office space. Unless you are operating a business that requires a physical footprint (i.e., restaurant, farm, etc), consider going virtual.
- Eliminate unnecessary perks: Free lunches might have to stop during a recession. While perks are important to attract and retain talent, employees will understand that during a recession the Thursday-night happy hour paid for by the company will have to be canceled.
- Reduce business travel: Instead of getting on an airplane, checking into a hotel, and paying for meals on a business trip, schedule a virtual meeting instead. Your colleagues or vendors will understand that a recession is happening and you are temporarily cutting costs.
- Reduce general expenditures: review your common, everyday business expenses and see what can be reduced. The goal is to be able to continue to operate with just the essentials. Review digital memberships to publications, software subscriptions, streaming services, etc. What can be put on pause, what can be downgraded to a lower membership level, and what can be canceled?
- Pause the roll-out of new products: New products and services in your pipeline should be placed on hold until you have more clarity on the recession. Consider the Covid-19 pandemic which essentially changed our worldview and kicked off an entirely new way to live and work. Your new initiatives pre-recession might be rendered irrelevant and obsolete coming out of the recession.
As an entrepreneur, you need to be diligent about your cash flow and how you are spending your money. Understand your monthly fixed costs, and variable costs, and review your spending habits frequently to improve your bottom line. This motion will allow you to create a contingency plan to outline what expenses can be cut should cash flow gets tight.
The other goal with these tactics is to convert fixed-costs to variable-costs. With more variable costs, your small business is more elastic and can more easily adjust to economic recessions. Startups need to be nimble and flexible.
Ways a small business can keep operating during a recession
Small businesses can take steps to help them navigate a recession more easily. However, these recession-proof tactics need to be in place before a recession. Consider how each might apply to your situation:
- Build an emergency fund: Having an emergency fund in place can help your business navigate cash flow pressures during a recession. For example, if your business is generally healthy, but a customer’s payment is late because they are also figuring out what to do during a recession, you can tap into your emergency fund to continue to operate and replenish it when the customer’s payment goes through.
- Open a business credit card: A business credit card can keep your small business operating during a recession. In addition to being able to spend on essential expenses, you also have the option of using your business card for a cash advance. If your business credit card allows you to take a cash advance, you might determine that the high fees associated with the cash advance, and adding a new monthly payment to your debt obligations when cash flow is already tight, outweigh the potential negative impacts of the recession.
- Open a business line of credit: A business line of credit is a flexible way to manage cash flow during a recession. Using a business line of credit will have more favorable interest rates than a business credit card and will give you a longer period to pay back the debt. However, you need to determine if tapping a line of credit and creating a new monthly payment, when cash flow is tight, outweighs the potential negative impacts of the recession. For additional information on business credit cards and a business line of credit, review our article on Business Credit Card vs. Line of Credit: What’s the Difference?
- Deleverage your balance sheet: Going into a recession when you have existing debt obligations will make navigating it harder. The previous two bullet points regarding a business credit card and business line of credit might not work if you already have existing loans. Adding additional monthly payments might be too much for you to absorb. When a recession hits and less cash is coming in the door it puts you at risk of defaulting. Having a clean balance sheet with no debt obligations will put you in a better position to keep operating. For a deeper dive, review our article on How to Prevent a Business Loan Default.
The idea is to make your small business as recession-proof as possible. Without a plan in place, when the recession hits, businesses go into survival mode and make deep cuts (often too deep) and react defensively instead of implementing the plan that has already been thought through. Cutting too deep can negatively impact a business when it’s coming out of a recession.
Can a small business open a loan during a recession?
The answer to this question is yes, but it’s going to be much harder. Typically small businesses need to show cash flow, revenue, and profitability to a lender to take out a small business loan. During a recession, your operating costs might be in bad shape so you might not be approved or will be offered a non-competitive rate.
During a recession, the Federal Reserve will be adjusting interest rates. This might mean lower rates on loans, but if rates are too low for too long, it might cause inflation. In this scenario, the Federal Reserve will rapidly increase rates to combat inflation, while trying to not cause another recession. The reaction from the Federal Reserve all depends on what caused the recession. They will be constantly looking at data and will make adjustments accordingly.
Securing credit to help you operate during a recession
Biz2Credit can help merchants review financing options, find the right type of loan, and loan funder for their needs. We have the experience needed to guide your business to the ideal funding situation
Whether you are after a loan to expand your business or help you operate during tough times, Biz2Credit is a great place to start. Our helpful staff will provide you with exceptional customer service and will work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing can help you.
How to get instant access to financing