What is a recession?
To paraphrase the Bureau of Economic Analysis, a recession is "a considerable slide in economic activity." When economic growth stops for a lengthy time, this is called a recession. The stock market falling and unemployment rates going up are both terrible for business and could be signs of a recession. Though it's impossible to know when or why a recession will hit, there are steps that small business owners may take to protect their operations.
When and why a recession will occur is a constant source of conjecture for economists. Recessions have typically started after an economic expansion has reached its apex. Interest rates are raised as a means of taming inflation when economic activity, such as investment activity and the real estate market, increases rapidly. When interest rates rise, it puts a hardship on the economy for people and companies who aren't prepared for it, and it also causes a domino effect of other expenditure swings and can influence international trade and policy. The Great Recession, for instance, started around the end of 2007 and continued through about midway through 2009. There was a sharp drop in real GDP and an increase in the unemployment rate, making this recession one of the longest and worst in history. We can thank Wall Street greed, lax regulation, the housing bubble, and subprime mortgages for this catastrophe. During the two years of the great recession, American families saw their net worth fall from $69 trillion to $55 trillion as a result of falling real estate values and the sinking stock market.
How does a recession affect small business owners?
Many business owners today worry about a recession because of the constant threat posed by inflation. Inflation in the United States reached 9.1% in June 2022, the highest rate since records began being kept in 1980. The public's worry that the next economic downturn is already here or imminent is exacerbated by the current inflationary environment. 65 percent of American entrepreneurs surveyed by Digital.com expressed anxiety that rising prices could force them to shut down their companies. Additionally, the poll found that many small business owners with 500 or fewer employees have already seen the negative effects of major supply chain challenges resulting from the epidemic. In response, some companies have had to reduce headcount, go out of business, or rethink their strategies altogether.
A recession can also directly affect small business owners in the following ways:
Decreased revenues
Customers alter their spending habits as inflation and interest rates increase. Households must reevaluate their financial situations because of worries about losing income, becoming homeless, and seeing their savings and retirement funds dwindle. People put off major expenditures like machinery, houses, cars, and furniture. Customers, fearful of the future, start looking around to see what they can save money on instead of basing their purchasing decisions on personal preference or brand loyalty, which can be bad news for the local companies that have traditionally served those customers.
Credit concerns
Reduced monthly cash flows may be experienced by small business owners during economic downturns due to difficulties in collecting accounts receivable, higher expenses for supplies, and lower revenues. Small business owners may have problems making ends meet and receiving new financing due to the fact that cash flow and annual revenues go into determining personal credit ratings and impact business credit histories.
Decision making
A recession forces difficult choices on small business owners. Even while business owners attempt to keep their long-term employees on staff, the current economic downturn could force some to lose their jobs. They may have to terminate ties with suppliers in order to investigate more affordable alternatives or delay expansion plans, both of which can cause friction and additional strain in other areas of business. When business owners are put under additional stress, it can have an adverse effect on the company's bottom line and ability to operate.
Tips to survive the recession
Small business owners can mitigate the effects of inflation and a possible recession by taking certain precautions, but these measures are far from foolproof.
Cut operating expenses
One of the finest ways to prepare for difficult times is to examine the money that is leaving your firm. Many small business owners don't realize that common overhead costs are easy to slash during a down economy. You may want to have a look at the following company expenses.
Location
The geographical strategies of several companies have shifted since Covid-19. As a result, many entrepreneurs who formerly rented or leased commercial premises have shifted their operations to rely more heavily on remote workers and on-the-go sales and support. It became possible for businesses to function effectively without a fixed location, which encouraged business owners to think about the viability of a remote operation for the foreseeable future. To better weather a financial storm, you might want to think about conducting business remotely so as to cut down on rent and utility expenses.
Reduce inventory
The cost of stocking merchandise for sale accounts for a sizable proportion of the revenue earned by stores. Reduce stock levels if possible throughout this recession. If your company can get by with less inventory on hand, it can save money on shelf space and on the continual purchase of new products.
Travel
Meeting with clients, establishing and maintaining connections with suppliers, and carrying out other company activities all necessitate travel on the part of company employees. Some or all of the operational travel, however, can be avoided. If you need to cut costs, one option is to temporarily or permanently halt all business travel. Virtual meetings, using subscription-based software like Zoom, or conference calls can fulfill most organizational requirements.
Vendors
With rising costs and disruptions in the supply chain adding pressure, small businesses may want to reevaluate their present relationships with their suppliers. If your company is suffering as a result of the slowing economy, then your suppliers are probably going through the same thing. Renegotiate costs and terms with your present service providers. Unless revised terms can be agreed upon, you may want to look elsewhere for your supplies.
Advertising
Advertising and promotion can eat up a sizable chunk of a startup's cash flow. In the face of a possible economic downturn, it's prudent to take a close look at marketing costs and search for ways to cut back. More in-house advertising, such as email campaigns or social media activity, can help spread the word about your firm without breaking the bank. You might also try hiring freelancers or contractors if you're looking to save money on advertising.
Customer base
Communities are built in part by their small enterprises, and even in hard economic times, the general public stands by their proprietors. Share your evolving business ideas and keep your consumers updated on your staffing, economic, and resource needs. When it comes to future earnings, the extra effort may be crucial in preserving current clients and attracting new ones.
Consider price increases
Although it may go against your business's goal, raising pricing during economic hardship could be the lifeline your small company needs to make it through. Investigate your present business model and revenue sources. Exactly what is it that you're offering, if anything, to customers? Is there wiggle room for pricing hikes? You can either look at the date of your last price increase or decrease to get an idea of how much of an increase your clients can handle. An easy way to gauge the impact on profits is to raise prices gradually.
Where to turn for help
The unknown can make success seem out of reach for a small business owner, despite the fact that it is conceivable for their company to fare better during and after a recession. There are strategies that can help your company weather the economic storm and emerge stronger and more profitable than before. Take a look at the following options if you need assistance.
Congress
Some small business owners have found respite after lobbying their federal representatives. Many leaders in the small business sector have taken an effort to contact lawmakers via letter writing, phone calls, and conferences to voice their concerns and urge them to alter legislation that negatively impacts their companies. Last month, entrepreneurs and seasoned professionals gathered in Washington, DC for events like the Goldman Sachs 10,000 Small Business Summit to discuss ways to tackle inflation. The owners of small businesses are also advocating for the small start up business loans to regain its former power.
Financing options
Concerns about cash flow and challenges in repaying small business loans and other business debts are two examples of the negative consequences that a recession can have on the operations of small businesses. Despite this, there are still a variety of funding options open to proprietors of small businesses, especially during a recession.
Cash flow concerns
Consider working with an expert in small business lending to obtain a business loan and rebuild cash reserves as a strategy for managing fluctuating cash flows or decreased revenues caused by increased expenses or interruptions in operations. This will allow you to better manage these types of financial challenges. The following kinds of finance choices have the potential to alleviate the strain of declining cash flows:
● A business line of credit is a revolving line of credit from which the borrower may draw funds as needed, up to an approved maximum credit amount.
● A term loan is a type of loan in which the lender gives you a lump sum of money upfront, and you pay it back over time with regular payments and an interest rate that might be set or variable.
● Loans from the Small Business Administration (SBA) can help small business owners get the funding they need with more reasonable interest rates and fewer initial outlays of cash.
Business debts
It could be a good idea to look into refinancing if the prospect of a recession is making you nervous about your capacity to keep up with your loan or mortgage payments. For both startup funding for small business and credit card debt, a business credit loans start up can be obtained from the same or a new lender. The repayment conditions of your existing debts will be replaced with the new terms agreed upon in a refinancing, which could result in lower monthly payments, lower interest rates, or even a lump sum of money depending on equity.
Conclusion
There is no foolproof method to protect your firm against a downturn, but you can get ready for one by cutting costs, shoring up ties with customers, and raising prices. You can contact Wealth Builders 365 to discuss financing possibilities if you're worried about the effects of a future recession on your firm. Wealth Builders 365's lending advisors may be the answer you've been looking for after hearing about how they helped a Small Business owner improve their cash flow with a line of credit.
