Business Recession Guide, Resources for Surviving an Economic Downturn
By If you own a small business, you may be worried about the possibility of a recession and how it will affect you. A recession is defined as a widespread economic downturn that can last for months or years, and it generally impacts all sectors of financial activity, so it’s a legitimate cause for concern.
Fortunately, there are steps you can take to increase your business’s resilience and help it survive a potential recession. This business recession guide will explain what kinds of businesses tend to weather downturns best and why, what it takes to find business funding in a recession, and what state and federal resources you may be able to draw upon, and more.
- Key Points
- • Building an emergency reserve fund covering three to six months of expenses can provide a financial cushion during economic downturns when cash flow becomes unpredictable.
- • Strategic debt management involves prioritizing timely payments to build your business’s credit history, which may help you access better loan rates and terms if borrowing becomes necessary.
- • Tracking cash flow by understanding incoming and outgoing funds helps business owners identify patterns and make informed decisions to improve financial health during challenging economic periods.
- • Reviewing supply chains and developing contingency plans can help protect businesses from disruptions, ensuring operational continuity.
- • Maintaining flexibility helps businesses adapt production methods, expand target markets, adjust marketing strategies, diversify revenue streams, and potentially even capitalize on opportunities emerging from economic shifts.
Top Strategies for Economic Resilience
Building resilience into your business plans can position your company to come through an economic downturn as strong as ever. Here are some tactics that may help you prepare your business for a recession.
• Build an emergency reserve fund. Especially while the economy is strong, it’s smart to put aside between three and six months’ worth of expenses to tide you through if times get tougher and your cash flow becomes erratic. This can help you stay afloat if a recession starts until you can get your business stabilized in the new normal. If building a fund doesn’t seem doable, it can be prudent to take out a business line of credit that you can draw on as needed.
• Manage your debt strategically. Prioritize paying off your debts on time to help build your business’s credit history, which may allow you to access better rates and terms if you need to borrow down the line. If you can, it may be worthwhile to investigate whether you can pay any of your debt off early so as not to have obligations later, or if you can get a better deal by refinancing your debt.
• Pay close attention to cash flow. It’s tempting to hunker down and focus on your business, not your financial spreadsheets. But the first step toward improving business cash flow is to track it. Understand what’s coming in and going out and why. When times get lean (or, ideally, before that happens), you’ll be informed and able to prioritize necessities and know if there are any nice-to-have costs you can cut.
• Review your supply chains. If your business relies on materials you acquire from other companies, it can be a good idea to consider how fragile those supply chains are and develop some contingency plans in case one of your suppliers fails. Having diversified sources – or at least a plan B – can be invaluable if recession strikes.
• Focus on strengthening customer relationships. Encouraging loyalty to your brand means more now than ever. Happy customers don’t just come back, they recommend your services to others and write positive reviews. Plus, it can be easier to retain customers than to attract new ones during a recession. Do your best to be responsive to your clients’ needs and make sure any issues get fixed promptly and cheerfully.
• Be flexible. Depending on your business, a recession may provide opportunities for you to rethink how and what you produce, expand your target market(s), change your marketing strategy, and even diversify your revenue streams. Financial worry can feel paralyzing, but staying open to the options can help your business move forward even during tough times.
• Create a plan. Taking time to think through potential challenges that might be caused by a recession and what steps you can take to meet them will let you develop a business continuity plan that can serve as your guide. Just remember that it will likely be an evolving document.
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Factors Affecting Business Survival in a Downturn
Every business is different — and so is every downturn. However, there are common external factors caused by the recession that can impact your business’s ability to survive. Here are some concerns to be aware of when you’re trying to help your company make it through a recession.
Dropping demand/sales. During a recession, consumer spending tends to decrease as disposable income gets tighter for many people.
Unpaid invoices. Clients who have already taken possession of goods or who have standing orders may be slower to pay you or not pay what they owe your business at all, impacting cash flow.
Inventory buildup. One outcome of falling sales is a strong chance that you may get stuck with more products on hand than you can sell.
Supply chain issues. Companies you’ve relied on in the past for goods, services, or transport may charge more, cut back on their offerings, or go out of business altogether.
Credit crunch. Finding business funding in a recession can be challenging. In a tougher economy, lenders are likely to be more demanding of potential borrowers. This means it can be harder to get funding if you need it to stay afloat.
Cash Flow and Liquidity Management
As already mentioned, managing cash flow is key to helping your business weather a recession. Cash flow is, put simply, the movement of cash in and out of your business. Positive cash flow means that more is coming in than going out, meaning that you have the liquidity to pay your bills easily.
If you’re anticipating a recession and aren’t sure that you’re going to be able to rely on consistent sales, it’s important to assess what you can do to manage your cash flow and make sure you can pay your debts while your company finds its feet in the new economy.
A strong cash reserve is a useful resource here. Another option is to consider proactively taking out flexible funding, such as a business line of credit, which can give you the option of drawing money only if you need it. Strategizing to attract and retain customers and assessing your operations to see if you can cut costs or obtain supplies more economically may also help prepare you.
Recommended: Insolvency vs. BankruptcyAssessing Debt-to-Income and Leverage
Another tactic for recession-proofing your business is to maintain a healthy debt level. With a lower debt load, you have fewer obligations for the cash your business makes, allowing you more flexibility in case of unexpected expenses, slow periods, emergencies, or even new opportunities. Two useful debt metrics are your debt-to-income (DTI) ratio and your leverage.
Your DTI ratio measures your total monthly debt payments against your gross monthly income and should, ideally, be 36% or lower. This would suggest that you have significantly more money coming in than you need to pay out in debt.
Leverage is using debt or borrowed capital to pay for investments in your company. A ratio to watch here is the debt-to-equity (DE) ratio. This ratio looks at what you’ve spent on assets and compares what your company has borrowed against what it’s raised from shareholders and private investors. What ratio is appropriate depends in part upon your industry. Generally, in good times, a balanced ratio might be between 1.0 and 1.5. However, in tough times, a more conservative ratio of 1.0 or lower may be prudent.
Identifying Recession-Resistant Industries
While it won’t be your only consideration, if you’re just starting a business, you may be curious as to what industries are less prone to recession risk. Typically, recession-resistant businesses tend to serve consumers’ needs, rather than wants, or allow them to save money. Many tend to be in or adjacent to these industries:
• Healthcare
• Food and beverages
• Discount retail
• Utility-related
• Education-related
• DIY/repairs
• Financial services
• Information technology (IT)
• Social media
Balancing Growth vs. Overhead Costs
Even as you’re preparing for – or living through – a recession, keeping an eye on the potential to grow your business is important. A good way to preserve funds for expansion is to cut down on your day-to-day overhead costs. These typically include factors such as rent, insurance, and utilities. Usually, rent is the most expensive. Consider trying to renegotiate your lease, and evaluate whether you could make do with a smaller space or without a physical office at all, particularly if you’re able to allow some or all of your employees to work remotely. Reducing your overhead may allow you more flexibility when it comes to growth opportunities.
Understanding Government and Federal Support
If a recession hits, you may want to turn to the federal government and take advantage of some of the support it offers. The U.S. Small Business Administration (SBA) partially backs a wide range of SBA loans, reducing their potential risk for lenders and make them more accessible to small business owners who might have difficulty qualifying for bank loans.
The State Small Business Credit Initiative (SSBcI) is a $10 billion federal program that supports small businesses by providing the states with money to support entrepreneurs by providing capital and technical assistance to help them establish and grow their companies successfully.
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How to Secure the Best Financing in a Recession
Funding your business during a recession can be challenging. Whether it’s finding the best options available to you or just making sure that you’re keeping your credit strong, the following strategies may help.
Compare Rates Across Multiple Lenders
In a recession, many lenders may be more cautious about approving applications for funding like small business loans. But even when that’s the trend, different lenders can have different requirements and may often offer the same borrower different interest rates. That means that it’s generally smart to compare options from a wide range of lenders to see which one has the best available options.
No matter your small business needs, SoFi is here to help.
Consider your financial goals and your long-term plans, then choose funding options that best support those goals.
Bundle Business Checking and Financial Services
In many cases, getting your business’s financial services and products packaged together can save you money, since many banks offer a discount when you opt for a bundle. What’s more, having your services – such as your business checking account and payroll services, for instance – with the same institution may sometimes help streamline and simplify your processes. Finally, if you work consistently with a financial institution, you may be able to build a relationship that will lead the bank to offer you better loan terms than it might otherwise.
Maximize Savings With Strategic Tax Deductions
Taxes can be costly, but managing your potential deductions may help minimize what you’re required to pay. Every business’s situation is different, so it’s wise to consult with a professional tax advisor about your specific options.
• 100% bonus depreciation. If you’ve bought equipment to use in your business during the last year, you may be able to deduct the full cost, rather than depreciating it over several years.
• Note obsolete inventory. Anything damaged, out-of-date, or unsellable lowers the value of your overall inventory and thus your assets.
• Max out – or open up – an SEP IRA. Funds you set aside for retirement can be deducted, up to that tax year’s limit.
• Investigate tax credits. There can be tax credits for anything from energy efficiency to hiring to research and development. Talk to your tax advisor to find out what business credits might be available to you.
• Consider rewarding your employees with end-of-year bonuses. These may be deductible.
• Time your purchases and incoming payments. Depending on your situation, you may find it advantageous to lower your available cash by purchasing (and paying for) needed equipment now and/or by letting your debtors pay you in the new year. Just remember that these decisions will impact your next tax year.
Accessing Fast-Funding Emergency Loans
When there’s a crisis – whether it’s widespread, like the COVID-19 pandemic; local, like an earthquake or flood; or unique to your business – you may need to get funding quickly to help you make repairs, restock, and continue your operations. Emergency small business loans may be available to help you out.
If your region has suffered a qualifying disaster and your business can’t meet its obligations or operating expenses, you may be eligible for an SBA Economic Injury Disaster Loan (EIDL). These loans are intended to provide companies with working capital, while its Disaster Assistance loans are meant to be applied to physical damages. The maximum combined limit on the two loans is $2 million.
It can be helpful in this situation to have a business line of credit to draw on, but it may be difficult to apply for one after a disaster has struck.That’s why some businesses set up a line of credit during good times to use in cases of emergency.
Negotiating Vendor Terms and Raising Deductibles
When the economy is tight – or looks like it may be headed that way – it can be a good idea to review some of your standard costs, like supplies and insurance.
Suppliers’ costs aren’t always set in stone, and especially if you’ve built up a rapport with the companies you use, negotiating about anything they can do to lower what you pay them may help. Be prepared to give, too – perhaps by guaranteeing future orders or picking up the materials rather than having them delivered
Raising your insurance deductibles can result in lower monthly payments, too. Of course, it means that you will have to pay more upfront before your insurer pays out on a claim.
Strengthening Your Business Credit Profile
Working to keep your credit profile in good shape is always important. And even though it may seem harder during a downturn, it remains just as crucial. Having a strong credit history can help you get a loan even during a recession, when lenders tend to be more cautious, and it may even help you access lower interest rates and better terms.
Managing your debt effectively so that you’re able to pay all your bills on time can go a long way toward helping your credit health, as can keeping your overall debt level low. Monitoring your credit reports may help you spot any errors and get them corrected. And maintaining a good relationship with your lender so that they may be more familiar with your financials and willing to lend to you.
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The Takeaway
Steering your business through a downturn is undoubtedly a challenge. However, with forethought and preparation, you stand a much better chance of getting through it unscathed. Shoring up a strong cash reserve, streamlining and optimizing your operations, managing debt effectively, and taking advantage of the resources available to you can all help you succeed and survive through a recession.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can I get business funding online during a downturn?
You may be able to get online business funding in a recession. Online lenders often have less stringent requirements than other lenders, and that may still be true during a downturn. However, it’s more challenging to obtain most kinds of funding during a recession, and your ability will be affected by factors like your company’s financial stability and credit history.
Does the government offer low-cost business programs?
Yes, low-cost business programs are available through the federal and state governments. The U.S. Small Business Administration (SBA) offers a free learning platform for entrepreneurs. Additionally, every state has at least one Small Business Development Center. These are funded by the SBA, the state, and local universities and provide no- and low-cost personalized and confidential advising and technical help.
Which industries are the most recession-proof?
Historically, recession-resistant businesses have tended to be in areas that support people’s needs, rather than their wants. These can include healthcare, food and beverages, discount retail, and repair, among others.
What happens to my business loan if the business fails?
Simply closing a business does not end its debt obligations. If your business fails, creditors may try to get their money from your business assets or, depending on the entity structure and whether you signed a personal guarantee on a loan, your personal assets.
Should I pay off business debt or save cash during a recession?
Every business is different, but typically, during a downturn, it makes sense to prioritize saving cash to maximize your financial flexibility. If you have a significant cash reserve and high-interest debt, however, you may want to work to manage that debt, either by paying it down or by refinancing it.
How do Federal Reserve interest rate changes affect my business loan?
The Federal Reserve interest rate serves as a benchmark for the prime rate, which in turn is a benchmark for the interest rates lenders charge on loans. If you’re considering a business loan, low Federal Reserve interest rates suggest that you may be able to get a lower interest rate. If you already have a business loan, changes in the Federal Reserve rate may or may not affect it. When you have a fixed-rate loan, your interest stays the same throughout the life of your loan. But if you have an adjustable-rate loan, your rate will adjust with the market, which is influenced by the Federal Reserve rate.
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