Small and medium businesses make up the vast majority of the U.S. economy – 99.9% of all businesses – so it’s understandable why many small owners are worried about the impact of a possible recession. Since 25% of small businesses do not have sufficient cash to cover a two-week downturn, owners are understandably seeking steps to prepare.
In this article, we’ll walk through what a recession is and how your small business can prepare to ensure your accounting and finances can weather a storm should it arrive.
What is a recession?
A recession is “an economic contraction starting at the peak of the expansion that preceded it and ending at the low point of the ensuing downturn,” according to the National Bureau of Economic Research (NBER). One common rule of thumb is that a recession is constituted by two consecutive quarters of a decline in the country’s GDP.
This is a current topic of conversation because depending who you ask the U.S. is either 1) already in a recession or 2) getting very close to one. The Federal Reserve Board has raised interest rates and the economy has contracted in two consecutive quarters, so it certainly seems that if we are not in a recession yet, we’re on the verge of one.
For these reasons, it’s crucial for small business owners to start preparing for a downturn if they haven’t already.
1) Explore financing options
If your business may need additional capital to continue operating (or growing) during a downturn, it’s worth exploring financing options now.
This could mean opening up a line of credit, refinancing or consolidating debt, or finding a new loan. One great option NEWITY recommends to its members is the SBA 7(a) loan program. SBA 7(a) loans offer very favorable terms, which is why it is the among the most popular SBA loan program and the U.S. government’s primary offering for business financing.
While NEWITY provides access to SBA 7(a) loans up to $250,000, the SBA 7(a) loan terms are as follows for a $25,000 loan:
2) Revisit insurance coverage
Some companies may cut back on their insurance coverage during a recession to lower costs, but it’s crucial to consider how this could impact your level of risk. Recessions can increase your exposures, meaning during difficult times, you should pay more attention to your policy limits and levels of coverage.
When preparing for a recession, it might be a good time to look into alternatives to your current insurance policies or even to add new types of coverage to protect your business during the downturn. NEWITY’s insurance partner, Mylo, can help businesses customize the right coverage for their needs, regardless of business size or scope.
With access to more than 200 insurance companies, Mylo can provide policies across areas such as:
3) Communicate frequently with customers
While it may be tempting to keep up appearances as if nothing has changed – or worse yet, to cut marketing and communication – a recession is the time when you should be transparent and communicative with customers.
Your customers need to hear about what you are doing to strengthen your business to last through a downturn. They also should be given the opportunity to support you even more, for example, by making purchases.
Everyone, including your customers, is likely worried or facing their own struggles. Find common ground with them and it may lead to better relationships and more sales going forward.
4) Conserve cash and cut costs if necessary
Remember that statistic from the beginning? 25% of small businesses don’t have enough cash to make it through a two-week downturn. If that sounds like your business, or if you’re worried about cash flow, now is the time to start saving and cutting costs. Here are a few ways to increase your cash reserves and make them last as long as possible:
NEWITY’s accounting partner, Xendoo, can help you with bookkeeping and provide full-service tax assistance so that you are financially prepared in the case of a possible recession.
5) Look at potential new lines of business
Small businesses could face a variety of challenges during a recession: they could lose current customers, struggle to increase sales from new customers, or their current business model could fail entirely.
While staying the course might be the right move for businesses who face decreased sales, others might need to consider potential new lines of business or opportunities to expand offerings. For instance during the COVID-19 pandemic, fitness studios and gyms started offering online live classes.
Even if your primary business is struggling, there may be ancillary opportunities. Stay open to all possibilities and seek ideas from your current customers.
If you’re worried about how the economic situation may impact your business, start by following the steps above and exploring our other tips for weathering recessions in the Insights Corner.