5 Ways a Recession Affects Small Businesses

When building your business, it’s easy to look at all the exciting opportunities that lay ahead and dream about the future possibilities that await you. It’s imperative to prepare yourself and your business for when the economy isn’t running on all cylinders, and make sure you have a plan to make it out on the other side with your business still intact. 

But when the term “recession” begins to float around, it’s important to understand what that term means, as well as what it means for your business. A recession refers to when the economy is in a slump or, more specifically, when there are two quarters in a row of negative economic growth. Even if you have a recession-proof business, it is likely that you will still feel some negative affects of any recession.

Let’s go over a few of the things you should be prepared for when tough times hit your small business so that your business can survive during a recession. 

5 Ways a Recession Affects Small Businesses

1. Reduction of Staff

Many small businesses treat their employees as a family, so when the budget gets tight and you don’t have the ability to pay staff as you have in the past, it can be very disheartening. But part of running a business is being able to work through this process. 

There are several options you can look at when it comes to reducing staff. If you feel like it’s only a temporary issue, you can look at furloughing and offering partial compensation if they agree to come back after a furlough. This can save money in the long run, as you wouldn’t need to hire and re-train new employees once the recession passes and business begins to pick back up.  Sometimes, a partial furlough may not be enough, and you may have to lay off staff.

The main factor while working through this process is to hold the integrity of your business and staff as high as possible. Tough times can be inevitable, but how you handle it will determine if people will want to come back and work for you. 

2. Credit Tightening

Small businesses are already at a disadvantage when it comes to opening and maintaining lines of credit when compared to larger competitors, and a recession doesn’t help. Many small businesses get their credit from banks, and when their collateral and ability to pay their balances begin to thin out, the banks aren’t as likely to continue to hand out loans. 

Many small businesses that are already in a high level of debt can be crushed quickly in the face of a recession. If you haven’t planned for some bumps in the road, your business could run out of credit, quickly leaving you out of business. 

3. Less Cash Flow

When consumers begin feeling the effects of a recession, some of the first things they will begin to reign in is their extra spending. For many small businesses, this can tighten cash flow in a hurry. If you try to go about spending as you have before, and do not adapt to the economic climate, it can prove even more costly to your available cash flow. 

With less money coming in, there is less money to be invested back into daily business operations. If you haven’t set back some emergency money to help out through this period, it could be catastrophic for your business. 

One of the ways to make sure that you keep some cash coming in is to identify what you can offer the market during a recession. That are many products and services that still sell fairly well during a recession. The key is to identify what you can offer and customize it so that you are adding value to the marketplace during a tough economy.

4. Price and Profit Reduction (Due to Price Wars)

Recessions can really bring out the competitive side of businesses that are simply trying to make it another day. Businesses may begin dropping prices, even if it means taking a loss because it is worth it if means more customers walk through their doors. Dropping prices is a commonly used strategy by some businesses during a recession to help increase sales.

This means you will need to focus on the big picture, and not on your current situation, if you want to make it through a recession. Sometimes taking that loss and lowering your prices can keep the doors open for the long game. 

When consumers and businesses are both in their defensive/scarcity mindsets, it can make your business sector a tough market in which to work. It’s important to remember that your customers are feeling the effects of the recession in their day-to-day lives as well, and if you aren’t prepared to adjust and adapt to their needs, your business might be the next one with a “Business for Sale” sign hanging in the window. 

5. Unprepared Businesses Usually Fail

If you have not prepared your business for the chance of a recession, there is a high probability your business will fail. There must be a plan in place that has your business prepared for times when money isn’t coming in as it normally would. 

 The economy will always have ups and downs, and there will never be a perfect time to be in business. There are definitely more positive times to start one, but it’s important to be prepared with a backup plan and emergency funding, which will set your business apart from the competition when things seem to be spiraling out of control in the world around you. 

Conclusion

While there are some businesses that perform the worst during a recession, almost all businesses will feel some kind of affect from an economy downturn. Knowing the affects of recessions on your business will help you and your business navigate the climate with confidence.

Katie Budd

Team Writer: Katie Budd is a full-time 8-5er in the commercial insurance industry and works on building her freelance writing business. She enjoys creating engaging content for people to read. She also enjoys working out at home doing Street Parking programming, encouraging her kids to chase what they are passionate about, and spending as much time on the farm with her extended family as possible. Follow along with her on her blog and Instagram as she continues to put thoughts into words.