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How Your Small Business Can Prepare for a Recession

Written by Live Oak Bank

how your small business can prepare for a recession

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While it’s impossible to forecast what will happen with the U.S. economy, experts predict a 70% chance of a recession in 2023. With the recent interest rate hikes to combat rising inflation, there’s a good chance we’ll see a downturn in the U.S. economy, though some think a “soft landing” is still possible. As a small business owner, it may feel overwhelming to think about the consequences of what a recession could mean for your business; however, there are plenty of ways to prepare your business for challenging times ahead. Live Oak Bank remains committed to supporting small businesses and encourages all business owners to focus on tactics to build resiliency. Read on to learn about how to prepare for a recession.

Learn to be Adaptable

First and foremost, it’s essential to stay nimble and adapt to things out of your control. Lean into strategic adjustments that will help your business weather the storm. The importance of a proper mindset cannot be overstated. A positive attitude and a clear plan can go a long way in hard times. In fact, according to Live Oak’s 2022 Voice of the Customer study, conducted by Barlow Research, more than 50% of Live Oak customers are generally optimistic about their finical situation.

Manage Cash Flow

Cash flow is the lifeblood of any small business, which means wisely managing your cash flow is critical. Joel Mueller, managing partner and research director at Barlow Research Associates, notes that rising interest rates could cut into profit margins, which will negatively impact cash flow. There are various ways to reduce your monthly outgoing cash flow, including pulling back on discretionary spending, negotiating better terms on your lease and leveraging less expensive marketing tactics, like social media. Keep a close eye on your accounts receivable—invoice promptly and set expectations for prompt payments from your customers. Take time to evaluate your payment terms and potentially offer slight discounts for early payment. Avoid tying up your cash in additional inventory and only order when you need it. If you have outdated inventory on hand, consider liquidating it at a discount. Even the smallest adjustments could help improve your cash flow during a recession, so continue to explore the best ways to keep your cash flow strong.

Evaluate Your Operational Efficiency

Do more with less, as the saying goes. This is a pivotal moment to assess all operational facets of your company and identify ways to optimize processes. After tracking businesses over the past three recessions, researchers at the Harvard Business Review found companies that implemented operational efficiencies during these downturns(while still strategically investing in future growth) performed much better after the recession than those who opted to lay off employees. Start to audit your processes and the technology you use now, so you can streamline outputs and find ways to incorporate automation. Digital tools like project management platforms promote transparency and accountability, while leveraging data to drive key decisions. Keep in mind, none of the efficiency gains are possible without your team’s adoption and willingness to learn a new approach. Encourage collaboration and communication to foster this behavior in your employees.

Get Capital Before You Need It

The most ideal time to secure a business loan is before you need the cash. Educate yourself on the options so that you can lock in the right form of capital. Working capital loans are a wise choice because the use of funds varies — from marketing needs to equipment and technology upgrades, you can use the money for nearly any business purpose and can be essential to keep your business moving forward. According to Live Oak’s Q4 Business Pulse, 57% of small businesses that expect to apply for additional credit over the next year will do so for working capital. Now is the time to explore your small business loan options, including working capital, because you’re more likely to qualify for financing when your cash flow is strong. It will be harder to secure a loan when the economy is unstable, so it’s something to pursue sooner than later.

Invest Wisely in Marketing Opportunities

While a marketing budget may seem like a logical place to cut spending, it’s time to double down on pushing out a consistent brand message to maintain your credibility. A recent study revealed that brands who cut ad spending risk losing 15% of their revenue during a recession. Customers are looking for reliable, strong businesses who can provide stable services or products during a recession. While you may pull back on certain tactics that cost more, there are ample opportunities to stay in front of your audience in a cost-effective way, like organic social media posts and email marketing. Consider short-term incentives and price discounts to drive sales and boost market share. Stay relevant with a regular drumbeat of brand messaging. Check in with previous prospective customers and see if you can win them over with a discounted product or new offer.


Strengthen Your Fraud-Prevention Measures

Scammers take advantage of challenging times, and we know there’s usually an increase in fraudulent activity during a recession. According to the Association of Certified Fraud Examiners, 80% of fraud professionals believe fraud levels rise in times of economic distress. Now is a great time to assess what security measures you already have in place, and where you need to fortify. Ensure that your team understands the importance of cybersecurity awareness–never click on suspicious links via text or email and ignore robocalls. Many fraudsters may claim they’re from your bank or a government agency and ask to confirm confidential personal information. No legitimate agency or financial institution will ask for a money wire, gift cards or digital currency. Stay vigilant and don’t let your guard down. Predatory lending is another form of fraud that’s prevalent during economic downtown, so stay hyper-aware of any lenders that make offers that seem too good to be true.


Keep Your Customers Happy

While repeat customers are always important, they’re exponentially more so in a recession. Focus on solidifying their loyalty so those customers continue to support you. Consistently check in with your regular customers to keep an open line of communication and ensure their needs are being met. They’re likely facing challenges too, so help them overcome any pain points with potential shifts in your products or offerings. Many customers will be on the lookout for “deals” and opportunities to save, so this is a great time to remind them of the value your product or service provides. If you can retain your key customers throughout an economic downtown, you’ll be set up for success on the other side of it.

Be Transparent With Your Employees

A recession can cause stress for your employees, which makes frequent and honest communication more important than ever, especially considering the tough labor market we’re currently in. Touch base regularly with your employees and let them know why certain decisions are being made, and how those decisions may impact the business. Use challenging times as a chance to build engagement and camaraderie amongst your team. In the long run, overcoming hurdles together can boost morale and fortify your company’s culture — a silver lining in tough circumstances.

With nearly 32 million small businesses in our country, a potential recession could have wide-ranging impacts. There are ways to shore up your business and build a moat around your company to protect what you’ve worked so hard to build. Thwart the negative effects of a recession with ample planning, clear communication, and a positive mindset.


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