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Four Ways Small Businesses Can Prepare For A Recession

The warning bells are sounding for America’s economy in 2023. While no one can predict the future with 100% certainty, nearly every forecast has recession on the horizon. CEOs of the largest corporations are already slowing down their spending and hiring in preparation. Furthermore, many large corporations have also announced reductions in force. Should small-business owners do the same?

In times of economic downturn, lower consumer spending hits the balance sheets of small businesses especially hard. On top of that, a recession means that access to capital—already a challenge for small businesses—is even further constricted by higher interest rates and a reduction in commercial lending.

There are, however, steps that small-business leaders can take to prepare themselves. With advanced planning, it is possible to safeguard small businesses from a recession while continuing to operate—and even grow—in uncertain times.

1. Focus On Access To Cash

In a recession, the most important thing a business can have is liquidity. Lower consumer spending means that revenue for many customer-facing businesses is likely to slow down. Without access to the funds to pay vendors, rent and employees, businesses may be forced to shutter—as so many did during the height of the Covid-19 pandemic. Even in the best of times, small businesses operate on razor-thin margins and with low cash reserves.

Business owners can mitigate this risk by increasing the frequency with which they monitor and manage their cash flow. Tasks such as revenue projections and expense tracking should happen on a weekly basis so that business owners know their financial position and can adjust their activities accordingly. You don’t have to be an expert! Entrepreneurs can use accounting software or consider working with a professional to ensure they have the fullest picture possible of their current operations.

2. Reduce Expenses, Adjust Prices And Conserve Capital

Once a small-business owner understands their cash flow, they can improve their position by cutting costs and adjusting prices. In a lean economic period, it probably makes sense to pause growth plans such as hiring new staff or opening a new location. Business leaders should also be open to changing and/or adapting their services or products to focus on popular offerings that make financial sense.

Inventory management is another critical lever for businesses’ expense-revenue equation. Entrepreneurs should reduce inventory and avoid large bulk purchases when prices are trending upward. If prices skyrocket, they can try negotiating with their suppliers for longer payment timelines. The business-supplier relationship is mutually beneficial, and an open conversation is the best way to find the right solution for all parties.

New pricing structures are a key consideration, as well. For many, this might mean raising prices to meet short-term cash needs while saving money over the long term. While small-business owners might be hesitant to increase prices due to anticipated customer backlash, small-business owners, in particular, are finding success with radical transparency around pricing. As always, communication is key, and investing in customer relationships can maintain brand loyalty.

3. Secure Small-Business Funding, As Needed

If small businesses want to succeed in the long term, they need to survive in the short term. For many, that requires applying for loans or grants to cover immediate expenses such as payroll, rent and input costs.

It is important to secure financing before it’s needed. The likelihood of a small business getting approved for a loan or line of credit is greater when the business is doing well. If the business owner waits until the funds are really needed and/or the economy is in the middle of a recession, they might be declined by traditional lenders. Another point to consider is that the Federal Reserve recently announced it likely will need to raise rates more than anticipated, meaning that loans may get more expensive in the months to come.

Fortunately, responsible lenders may be able to help. For example, community development financial institutions offer affordable loans with transparent terms. Many of these CDFIs are open to everyone, but particularly work to ensure that underinvested small-business owners—including women, people of color, immigrants and those with low to moderate income levels—can keep their businesses afloat.

Community banks and credit unions may be a good option for small-business owners, as they often offer lower interest rates than bigger banks. In general, one way to ensure that you’re accessing fair, transparent and healthy funding is by borrowing from a signatory of the Small Business Borrowers’ Bill of Rights. Business owners should also look into offerings from city and state governments and other community organizations that oftentimes offer loan and grant support.

4. Get Expert Support To Navigate Difficult Times

Perhaps the most important piece of advice small-business owners can have as they approach an uncertain future is that they don’t need to go it alone. Some CDFIs and community lending partnerships offer free business coaching to help entrepreneurs access capital and navigate other challenges of running a small business.

Entrepreneurs can access free business coaching from a number of nonprofit organizations and government-affiliated resource centers. There are even options specifically tailored to the needs of veterans, women entrepreneurs and entrepreneurs of color. The U.S. Small Business Administration maintains a searchable map where entrepreneurs can find coaching and other resources in their local area. Coaching and other resources can provide guidance on financial management, access to capital and business strategy, among other topics. While each small business is unique, we can all learn from each other’s successes.

With proper planning—and a little bit of help—business owners can adapt to economic upheaval and be successful even in these turbulent times. This is important not just for individual business success, but also because, if a recession does unfold, American entrepreneurship will be a key factor in turning the economy back around. We rely on small businesses to provide millions of jobs and drive billions of dollars in economic activity, and their survival through this potential downturn will ensure our communities remain vibrant and resilient.

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