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Business Planning For a Recession

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You never know when a recession will come, but eventually, one will — it’s simply a normal part of the economic cycle. The question is how you’ll handle business planning for a recession.

Should you take out a loan or pay off existing debt? Should you cut expenses to build up cash reserves? This article includes strategies you can take to prepare your business for a recession and perhaps even come out of a recession stronger than ever.

Should you get a business loan during a recession?

A recession might seem like a good time to borrow money. After all, the Federal Reserve often lowers interest rates to spur economic growth, so you might be able to get a reasonable rate on a business loan. However, whether you should get a business loan during a recession really depends on your needs.

Here are some reasons you might consider taking out a loan:

  • You want to expand your business. “Recession” can be a scary word, but savvy business owners know it can also be a time of great opportunity. You may be able to take advantage of less expensive advertising to gain new customers and expand into new markets as competitors close their doors. In that case, it might be a good time to leverage financing to invest in marketing, inventory, equipment and more.
  • You have an immediate cash flow gap. During a recession, consumers tend to cut back on spending — especially on nonessentials like dining out, travel and durable goods like cars, furniture and home appliances. Securing a term loan or line of credit can help your business cover essential business costs even if you experience a temporary dip in sales.
  • You want to convert invoices into cash flow. Even if your revenues remain strong during a recession, if you make sales on credit, customers may take more time to pay their invoices. Invoice factoring could be a financing option to turn those invoices into cash flow.
  • You want to refinance high-cost debt. If you have credit cards or other debts with high interest rates, a recession might be a good time to refinance into lower, fixed-rate payments. This can also help free up cash flow that can be used elsewhere in your business.

Interest rates during a recession

Historically, the Federal Reserve has lowered interest rates during a recession to encourage consumers and businesses to borrow money, increase spending and stimulate the economy.

But our next recession might look a bit different. Recent inflation and increased demand have led the Fed to raise interest rates in order to tamp down runaway inflation, which could make it more expensive to borrow.

Business loans during a recession: Pros and cons

If you’re considering getting a small business loan during a recession, it’s important to consider the advantages, as well as the reasons it might be better to wait until the economy is on the upswing. Here are some pros and cons to consider.

Pros to getting a loan during a recessionCons to getting a loan during a recession

  You’ll have access to cash and can avoid cutting staff or other budget line items

  You never know how long a recession will last, so a cash influx can help you stay afloat

  You can refinance other high-interest debts to free up cash flow

  Monthly loan payments can negatively impact your cash flow

  It could be tough to find a bank or another lender willing to lend during a recession

  A loan might allow you to delay decisions you should have made earlier, such as laying off unproductive employees or cutting nonessential costs

Business planning for a recession

Whether or not you decide to get a business loan during a recession, there are strategies you can follow to prepare for a down economy.

Work on your business plan.

Long-term thinking can be a challenge when you’re just trying to get from day to day, but having a business plan provides a roadmap to ensure you’re profitable in the long term.

During a recession, review and update your business plan to address:

  • Potential expansion plans. Recessions can bring expansion opportunities if you have a chance to buy inventory or equipment from a competitor who’s going out of business. You might also see opportunities to diversify your income by offering additional products or services.
  • Marketing strategies. Many companies tend to cut their marketing budgets during a recession, but sales are the lifeblood of your business. According to research and advisory firm Gartner, companies that bounce back the fastest after a recession are those that don’t decrease marketing — and, in some cases, they’re even making marketing increases. Update the marketing section of your business plan to adapt.

Follow your budget.

Before and during a recession, your budget is your bible. You should strive to stay within your budget and periodically review spending and look for ways to avoid cost overruns.

You can find free business budget templates here.

Pay off high interest debt.

The Fed has already raised interest rates multiple times this year, and there’s a possibility that more rate hikes are on the way. Since business loan interest rates typically track with the federal funds rate, having variable-rate debt is risky.

Paying off high interest debt helps ensure you don’t get stuck with monthly loan payments you can’t afford, which can threaten business survival.

Keep expenses low.

Look for areas of your business where you can cut back without hurting sales or the quality of your products and services. Depending on your industry and business model, some areas to review with a critical eye include business travel, meals and entertainment.

Build a cash reserve.

Healthy cash reserves are one of the best ways to protect your business during a recession. Saving cash ensures that you have the money to pay rent, wages and other business expenses even if sales are slow, without going into debt.

If you don’t already have a business emergency fund, start saving now. Three to six months of business expenses is a good goal for most small businesses.

Frequently asked questions

Prepare for a recession by reviewing your budget and looking for ways to trim unnecessary expenses without negatively impacting sales or the quality of your products or services. You can also work to pay off or refinance high interest debt.

Having cash reserves on hand is crucial for a recession proof business. Even if sales suffer temporarily, cash on hand is necessary to stay afloat. With available cash reserves, you can continue to pay wages, rent and other necessary expenses without taking on additional debt.

Recessions affect different industries in different ways. For example, restaurants might see a decline in sales while grocery stores experience an increase because more people are cooking at home to save money. The key is considering how a recession might impact your business and planning for multiple what-if scenarios.

Some common steps that companies take during a recession include:

  • Reducing budgets
  • Delaying capital investments and technology upgrades
  • Laying off employees
  • Asking vendors to offer more flexible payment terms
  • Implementing a hiring freeze

According to research from McKinsey, the most recession proof businesses work on improving margins by reducing their operating costs and shoring up their cash reserves, allowing them to invest in the future.

 

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