For those of you who have an ear to the ground on American economic trends (or just listen to a lot of NPR Marketplace), you’ve probably heard the whispers of a recession heading our way, starting as early as this year.
Everyone remembers how hard their finances were hit back in ’08 — no one better than small business owners, some of whom lost everything during that time. Even top economists cannot predict how big an impact the next recession will have on small American businesses, rendering it difficult for business owners to prepare adequately.
The fallout of the great recession proved to be devastating not only for small business owners, but also for the employees who depended on them for steady income, and for the vendors who worked with them.
With the next recession on the horizon, small business owners need to start planning now and consider what they can do today (save money, rearrange finances) to cushion the blow that inevitably will come down the line.
To understand what this looming recession may mean for business owners, first we need to understand what typically comes with an economic downturn and learn from the patterns of the financial crisis of 2008.
How the Past Recession Affected Small Businesses
More than anyone else during an economic recession, small businesses are hit the hardest and face the longest recovery time. Luxury services typically are made obsolete first, since most of the population falls into financial survivor mode and eliminates products or services deemed nonessential. Overall, budget restrictions, a lack of preparedness, and limited spending can make it nearly impossible for a small business to continue to operate.
One of the main reasons small businesses suffer so greatly during recessions is because the majority run on a firmly controlled cash flow that the smallest deviation can undermine. Money is immediately handed off from owners to pay for the next most pressing expense.
If a customer, or multiple customers, delay purchases or payments, it can cause the whole operation to slow down. For example, small businesses with a few large, high-spending clients can go under instantly, should even one client decide to part ways. The combination of these factors can make it extremely difficult for a business to keep its head above water during a recession.
In the financial crisis of 2008, cash flow became the biggest problem for small business owners for the duration of the recession and the recovery period thereafter. That largely was due to banks withholding lending options from small businesses. Why? Because small and medium businesses are considered riskier ventures, and generally are less profitable than larger operations, making lenders wary about a return on their investment.
The lack of viable lending options in the hour of these business owners’ greatest need made a significant impact on the rapid decline of the health of many businesses across the nation.
Exactly How Bad Is It Going to Be?
Well, to be perfectly honest, it is tough to call how bad the next recession is going to be. With a volatile political climate and the fluctuation of the global trade market in the past year, the economic repercussions are still difficult to decipher.
The most recent government shutdown was a doozy for the economy, thrusting market watchers into a panic. Based on this observation, it would not be far-fetched to think that the next recession could be caused in part by political divisions and the hubris of those in power trying to prove a point.
Should the United States fall into another economic crisis, the divide between red and blue lawmakers may run so deep that the normally swift decisions to ease the initial blow of a recession could be slowed down, throwing the economy into further turmoil.
In some ways, we now have more foresight into predicting how and when the next recession will hit, but we might be less prepared to work with those across the aisle to deal with it quickly enough.
In that case, business owners must take early action to ensure the preservation of their businesses, the job security of their employees, and the communities they serve, not waiting to be rescued by those in powerful positions. As the saying goes, prepare for the worst and you will never be disappointed. Below, we will cover the most important things that small businesses can do to prepare for a 2019 recession.
1. Take On More Diverse Clients
Yes, this may be one of the more obvious tips for business owners to prepare for a potential economic slowdown, but it is still important and likely the first thing that should be done when signs of trouble are on the horizon. As mentioned earlier, if a small business relies on one or two big clients to bring in a chunk of the revenue and those clients also are hit by the recession, it can lose the bulk of its business and not have much to fall back on. By taking on a greater number of smaller customers from different fields, business owners can afford to take a hit if they lose a couple and survive without much issue.
Diversifying the pool of regular customers by searching for new relationships with previously unexplored companies and vendors will help ensure that cash flow does not slow down to a trickle or stop completely during hard times. Remember to not put all your eggs in one basket!
2. Nurture Your Business Relationships
Speaking of building new relationships, all business owners absolutely must build and maintain great relationships with the merchants and vendors they work with, or at the very least, keep amicable, open lines of communication with them.
When a crisis shakes up the economy, small and medium businesses need to hold on to each other for support if both parties want to make it through the storm. Compromises must be made between vendors and business owners during these times, and it certainly makes things easier to have those conversations when parties are used to communicating openly.
Say, for example, you are a small business owner and you need to break up your payments to a vendor in more manageable chunks. It is going to be less awkward to convince the vendor to work with you on a more sensible payment plan if you already have a strong relationship.
Being able to have a conflict-free conversation with your suppliers will help lessen the stress that comes along with being a small business owner during a recession. They need you as much as you need them.
3. Lean Into Marketing
Yes, you heard that right! During tough times, a lot of small businesses go into panic mode and cut marketing from their budget first because it is seen as the most expendable expense, but they may be shooting themselves in the foot. Big mistake!
Look at this from the consumer’s side of things: Their lives also have been thrown into a panicked state, and they also have been trying to act quickly. This may affect their buying habits, as frugality becomes paramount.
If anything, this is the best time to secure a new wave of customers by promoting your products or services with prices that are just below the competition. Go tell it on the mountain, and watch as the new business rolls in.
4. Setting Aside a Rainy Day (Or Longer) Fund
Business owners should give serious consideration to setting aside funds for a potential recession, just as they would for any other potential economic disaster. Smaller enterprises usually operate on modest profit margins, making it hard to set money aside for a rainy day, but by starting to set aside money now, business owners can alleviate stress and scrambling for funds in the future.
This, of course, may not be possible for every business, especially newer ones that do not have much of a cushion to start with. In that case, there is no time to start like the present! Taking a look at your business’ spending patterns will help you identify areas that can be slimmed down in order to funnel those funds to a reserve for financial emergencies.
5. Look Into Alternative Financing Options
In 2008, banks refused most small business owners seeking loans that had less than stellar credit, while bailing out larger companies because they were viewed as less of a financial risk. That mistake cost tens of thousands of Americans their jobs.
Between 2007 and 2009, large companies lost 7 percent of their job forces; small businesses lost 11 percent. With the history of small businesses creating about two out of three new jobs in the private sector workforce, banks denying loans to small businesses likely spun the recession further out of control.
Luckily, a plethora of alternative lending options have emerged since then, which can help small businesses stay afloat despite less-than-perfect business credit scores. In addition, alternative lenders can connect with business owners to find payment plans that work for them and get money into their accounts far more quickly than traditional lenders. That can be especially helpful for businesses surprised by a financial crisis.
Overall, the most vital things to take from the above: Diversify your client base; maintain your business relationships; don’t completely cut your marketing budget; try to set emergency funds aside; and look for financing options that will help your business weather any storm. Be prepared, and your business will be spared.