An Economic Downturn Can Drastically Affect Small Businesses: What Can You Do to Prepare?

10+ years after the Great Recession of 2006-2007, the U.S. economy is healthy. For the majority of small business owners, taking out loans to fund growth is relatively easy through conventional banking as well as alternative funding sources. Many small businesses sales are strong. But how long will this trend last? History teaches us that the economy ebbs and flows and on the heels of every boom there is an eventual downturn. Currently, there is a sense of uncertainty due to the political and economic climate here in the States and around the world. Additionally, as we come up on an election year in 2020, many people will sit tight and withhold spending. Let’s take a look at how an eventual economic downturn will affect small businesses and what small businesses can do to prepare.

Current small business trends…

Trends in the small business sector show that of recent, fewer and fewer small businesses are borrowing capital to grow and expand their businesses. More small businesses are focusing on maintaining their operations and profitability. Small businesses sense a shift in the economy earlier than large businesses and currently 43% of small and medium-sized businesses say that an economic downturn is on their radar and they are taking steps to prepare.

What to expect in a recession…

Lending comes to a halt: Traditional institutions stop lending to small businesses so credit and capital are restricted. This can spell disaster for unprepared small businesses.

Sales decline: Depending on your industry, your sales can suffer greatly. In an economic downturn, consumers reduce discretionary spending and move into a maintenance mentality. For example, if your business sells recreational vehicles or remodels homes, you will notice a sharp decrease in demand as consumers reduce spending on “extras” in order to focus on necessities.

Suppliers can’t be depended on: Supply chain disruptions are to be expected in tighter financial times. Some suppliers go out of business while others are spread thin and have a difficult time delivering on customer demands. Smaller suppliers are small businesses of their own and will be impacted more than large suppliers.

How minority-owned businesses are affected…

Even in our current economic boom, according to the PCA Index Survey Responses Trend Analysis by Pepperdine Graziadio Business School and Dun & Bradstreet, 60% of minority-owned businesses are reporting financing difficulties and as a result, a squeeze on business growth. 66% of minority-owned businesses say this squeeze will have a negative impact on hiring in 2019. When an economic downturn does come, minority-owned business who are already experiencing financing challenges will be at even greater risk.

So, what can small businesses do to prepare…

There are a handful of ways small businesses can prepare for a recession.

Diversify your client base: Because a downturn in the economy affects industries differently, make sure if at all possible, that your clients represent a wide range of industries. Avoid putting all your eggs in one basket.

Exercise financial discretion: Operate your business finances in such a way that you’re prepared if revenue gets tight. Think twice before making long-term financial commitments such as signing a lease or hiring new employees.

Secure your financing now: Take that line of credit now when money is easier to come by. Even if you don’t need it at the moment you will have it when you do, and you should only be charged interest on the amount you use.

Consider hiring freelancers and contractors: There’s nothing more painful during tight financial times than instituting layoffs. While layoffs are often necessary to help small businesses stay afloat, consider hiring freelancers or contractors to minimize this possibility. Layoffs affect company morale and can have a devastating effect on hard-working employees and their families.

Is your small business prepared for a recession? Visit our website and sign up for a complimentary strategic coaching session. We’re here to help!

 

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