Defined as a significant decline in economic activity, a recession is, technically, a downturn in Gross Domestic Product (GDP) for more than two consecutive quarters. The National Bureau of Economic Research (NBER) decides if the U.S. is in a recession and formally declares it only after meticulously tracking business cycles and considering certain indicators like decreased spending capacity of the mass, GDP drop for two or more years, increased unemployment, dormant retail sales and sluggish industrial production, and inflation. Often, a chain of multiple events in the economy, like supply chain disruption, financial crisis, a world event, or just an inflationary period triggers a recession. The possibility of a recession increases with the rising inflation, which eventually leads to layoffs, fewer jobs and higher interest rates. However, a recession is not permanent and usually lasts a few months or a maximum of a year.
Recently, the COVID-19 pandemic immensely contributed to a global economic breakdown. The retail came to a strident halt, hospitals got overloaded with COVID-affected patients, and high revenue generating industries like hospitality and tourism suffered colossal losses, with many restaurants shut down forever, due to the lockdown and rigid travel restrictions. As a result, during the pandemic phase, strikingly less money went into the economy. Also, a prolonged period of overspending can lead to a shortage of goods, which often leads to higher prices or inflation. This was witnessed during the initial phase of the pandemic. To tackle the crisis and balance out the economy, the Federal Reserve increased the interest rates and made goods more expensive to slow down the spending. During a recession, business owners not only need to discreetly manage their personal finances to pay for their daily living expenses but also their business finances to thrive in the industry and keep preparing themselves for the post-recession period, as a recession is always temporary. As delayed repayments drastically affect the credit score and make it difficult for the borrower to acquire business finances from traditional lenders in the future, it is extremely crucial for an entrepreneur to cautiously handle their debt obligations during a recession and also before it has hit the country. This is because the recession makes lenders more hesitant to lend money to applicants who have low credit scores and a bad or irregular debt repayment history. However, there are other lenders like alternative financers who are comparatively less stringent with credit score requirements and more concerned about the monthly/daily income of the business over the last year. Hence, business owners must keep looking for growth opportunities and try to ensure uninterrupted income or cash inflow even during a recession.
Tips to make a business recession-proof:
Communicate with vendors and suppliers
Credit scores often define the loan worthiness of an entrepreneur. Having high credit scores can open doors to multiple financing options even during the recession when credit score requirements become extremely stringent. The ideal way to improve credit scores is by making timely payments on business finance. But, sometimes businesses come across situations when it becomes difficult for them to make the payments on time. Hence, business owners must always communicate with their vendors and suppliers about the reasons, if any, they will be paying later than the agreed date and try to convince them to allow some more time to pay the invoices. Some vendors and suppliers, these days, have automated payment systems that report late payments to business credit bureaus, from which many vendors and suppliers evaluate the businesses’ credit reports before extending credit to them. Similarly, a business owner should communicate with his/her existing creditors, if he/she finds it difficult to pay the debt obligations due to certain unpredicted issues. Business finance providers like banks or alternative lenders usually help the borrowers by either extending a business line of credit, which can help the borrowers to pay for the ongoing business expenses and also make loan payments or offering a debt consolidation loan.
Acquire a business loan before the recession hits
Business owners must immediately look for financing once they foresee that their businesses are going to face serious money constraints in the coming few months, because depletion of cash flow is often a sign of the coming recession. Business loans help entrepreneurs to adapt to the evolving economic conditions, allow them to smoothly operate and continue generating revenue. It is always advisable to acquire a business loan before the recession hits because getting a business loan is much harder during recessions as the credit score requirements get highly rigid.
Invest in the business’s longevity
To stay profitable and ensure maximum customer retention even during a recession, business owners must invest in improving the customer experience and business model long before the recession hits. Business loans can be used to conduct an extensive market survey to understand the customers’ changing needs, incorporate cutting-edge technology, update the equipment, improve customer service, open multiple branches to cater to maximum customers and conduct impactful marketing strategies. This helps a business to gain a competitive advantage.
Savings often turn out to be a savior for business owners unable to make payments due to money-constraint during a recession. Hence, before a recession hits, entrepreneurs must consider reducing overheads by taking a salary cut themselves, relocating to less expensive office space, cutting down on low-priority expenditures etc.
Use technology as much as possible
The constantly-evolving technology has started a digital revolution all over the world. It has considerably improved the productivity of businesses and immensely contributed to the changing work culture. Companies can consider switching to a remote working culture, where they can save a lot of money on space and machine rents, electricity bills etc. Software like Zoom can be used to conduct online meetings, Google Docs can be used to consolidate files, common cloud storage platforms can be used to easily access data, and Salesforce, a CRM software, can be used to effectively manage the company’s relationships and interactions with its customers.
A recession is a part of the economic cycle of every country and hence, it can happen at any time. Therefore it is very important for entrepreneurs to recession-proof their businesses and learn to manage their business finances better before any economic downturn starts.