- Recessions are a natural part of the free market system; they occur when the Gross Domestic Product declines for two or more consecutive quarters.
- Inflation, or general price increases, can impact small businesses, especially regarding getting loans and paying off debt.
- Understanding broader economic concepts – and doing the best for your business – is important during uncertain economic times.
- This article is for small business owners who want to learn how to safeguard their companies during tumultuous economic times.
Recessions are a part of capitalism. The nature of markets means prosperity will sometimes rise and sometimes fall. But while recessions create uncertain times for small businesses, they can also be times of opportunity. Understanding crucial economic concepts, safeguarding your business, and keeping a good attitude can prepare your organization for any impending economic storm.
How recessions impact small business
Starting a business is exciting and intense. However, no matter how successful and efficient your business becomes, it’s still at the mercy of outside factors. Changing global events, turbulent markets, and trying economic times make running a successful small business a challenge – and an ultimately rewarding one once the storm clears. Everyone is impacted when the economy contracts and enters a recession, but small businesses are often the most vulnerable.
Small businesses are on the front lines of changing economic times. With current inflation levels hovering around 8% and the Federal Reserve Bank raising rates, but seemingly not fast enough, layoffs and productivity downturns are slowly becoming a reality for many small businesses. In fact, 75% of small businesses report feeling the pressures of current inflation, according to a 2022 study by Kabbage.
This difficult forecast, coupled with the after-effects of supply chain management issues caused by the pandemic, means small business owners must be more careful in their decision-making than they would during more prosperous times.
Collateralized debt obligations (CDOs) caused the 2008 economic crisis, and some experts feel their resurgence could contribute to more adverse economic events.
Tips to prepare your small business for a recession
There are several concrete steps entrepreneurs and small business owners can take to prepare for a potential recession.
1. Secure capital before you need it.
Having cash reserves and other financing options to fall back on once a recession hits is a great tool to stay afloat.
“Flexible working capital will be the single most important factor to help keep doors open, as it was in 2008,” said Eyal Lifshitz, CEO of BlueVine. While acquiring capital may be a challenge once a recession hits, there is still time to enact this strategy.
“Raising capital has become much easier today for small business owners,” Lifshitz said. “Banks are easing credit, and fintech startups are expanding online lending options. So securing capital at a time when the future is unclear would be a smart move.”
Looking to secure capital to recession-proof your business? Check out our list of the best business loans to compare rates and terms.
2. Talk to partners and suppliers now.
As with most small business issues, getting ahead of the problem as quickly as possible is the safest way to protect your company. One way is to stockpile some cash, but another way is communicating with your partners and suppliers.
The biggest danger in a recession is uncertainty. By eliminating uncertainty with your partners, even if it’s by giving them bad news, you’re protecting your business. Set expectations early to try and mitigate problems.
“Chances are these businesses will be faced with the same challenges,” Lifshitz said. “SMBs need to have open conversations with their partner networks now about the recession and their game plans to gauge the potential impact to their own business – and seek alternative partners as needed.”
Many people keep your business going, and you want all of them to be on the same page as you are when it comes to a recession.
“Talking to your partners and suppliers is important, as you always should keep a pulse on those that help your business churn,” said Jennifer Earley, owner and marketing strategist at Amplified Marketing Services. “You are easily able to seek out ways that you can do business better, as well as identify potential pitfalls before they happen.”
3. Think twice about big investments.
Rethinking how you spend money is an effective defense against a recession cycle, as is examining your cash flow strategies. Ironically, decreasing business spending will theoretically prolong a recession, but your company must protect its interests and ride out the storm.
Sometimes, you’ll need to delay larger purchases or make do with current resources to ensure your company will make it to the next boom cycle.
Lifshitz warns that big decisions like opening a new office, signing a new commercial lease, or buying new equipment may be financially sound while business is booming, but could come back to haunt a business owner if a recession hits. Consider the following spending questions:
- Do I really need state-of-the-art equipment?
- Should I commit to long-term real estate or a multiyear software contract?
- Is it the right time to hire more people, or should I wait?
“You simply don’t want to have your business on the hook with large debt repayment if cash flow isn’t coming in as projected due to market softness,” Earley said. “I recommend reduced spending and [to] spend in areas that are necessary for keeping the lights on or have proven to have a strong ROI in the past.”
Another consideration is that borrowing money is more expensive during an inflationary recession. Because the Federal Reserve Bank is raising rates, lenders are lending money at higher interest rates, making the cost of capital more expensive. While securing capital to keep your business afloat is essential, it’s crucial to temper any borrowing desires with the reality that your interest rate will remain high.
Stagflation is another economic condition. During stagflation, prices rise, currency loses value, and job creation suffers.
4. Build an agile workforce.
“Layoffs leave a wide wake of damage, impacting the livelihood of the people let go, disrupting the business, and even tarnishing culture and brand,” said Lifshitz, adding that it’s essential to hire thoughtfully, and consider contractors and freelancers if you have a potential downturn on your mind.
Earley said many businesses and organizations live by the mantra “do more with less.”
“It’s important to have a workforce that is able to pivot and quickly react when needed,” she said. “With my small business clients, we continue to discuss resource allocation and the importance of cross-training the team in certain areas so that there’s always a plan A, B and C to delivery.”
She added that this applies to profitable times and times of recession because “if done the right way, there is always going to be talent on the team that can continue to move the ball forward, reducing the need to spend time (and money) ramping up resources.”
Use the best accounting software to keep a firm grip on your finances and adjust if you see signs of a recession.
Is a recession looming?
The short answer is that it’s up to interpretation. While the U.S. economy experienced a contraction in the first and second quarters of 2022, early Q3 reports show the economy is growing, which means there might not be a recession looming. This, coupled with rising inflation rates, makes for a confusing situation for small business owners and policymakers alike.
During times like these, don’t get caught up in what’s happening in the news. Instead, focus on what’s happening to your business. One way to arm yourself with information during this time is to understand the fundamentals of recessions and inflation.
- A recession occurs when the economy declines for two consecutive quarters. This is typically measured through Gross Domestic Product (GDP), or the overall measure of how much goods and services are produced within the U.S. economy. When the economy contracts, businesses and individuals are less likely to spend money, invest, and take business risks. Instead, they stockpile cash to ensure their business survives the approaching storm.
- Inflation, or the overall rising in prices due to economic factors related to supply and demand, can impact how your business makes decisions. If prices rise quickly – and interest rates go up to try to combat price hikes – you may be deterred from borrowing money, taking on new projects, or developing new business. It may also allow you to pay off low debt levels faster, since your money is of lesser value.
With these two concepts in your arsenal, you can better manage what’s happening to your business. For example, when CNN reports that the Federal Reserve bank is looking to embark on its most aggressive inflation-rearing strategy in decades, adjust your business strategy and decision-making to handle higher interest rates so you can ride out the looming recession.
Along with a country’s GDP, its fiscal policy and monetary policy also influence the overall economy and its economic goals.
Do your best to weather the situation
Recessions mark times of uncertainty for small businesses. Educate yourself on broader concepts of economics, and then react to problems your business faces with the long game in mind.
Sometimes, owning a small business means making the best decisions you can and hoping for the best. Recessions can also be a time of great opportunity for many businesses. Investing in low markets, paying off low levels of debt during inflationary periods, tightening processes, and improving business efficiency are all ways your company can find a silver lining during trying economic times.
Jennifer Post contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.