6 Financing Tips to Help You Prepare Your Business for a Recession

Ask yourself, what effect would a recession have on your business? If you’ve been riding the economic highs, are you prepared for the inevitable lows?

Successful business owners understand how to ride these waves while working towards both their short and long-term goals. Doing so involves sound financial fundamentals, and in many cases, an injection of capital to smooth the rough patches.

Here are a few tips and tricks to help make sure you’re prepared for whatever hits this year may bring.

Prepare for Rising Interest Rates

In a recession, it’s possible the interest rates on your current loans or lines of credit (LOC) will go up. Even a small bump in rates can quickly eat into your profits. If you’re taken by surprise, you may have to dip into savings just to stay afloat. Any plans you had for future growth will almost certainly get pushed back.

Securing fresh capital during the recession will come with higher interest rates, too. A line of credit might be useful to fill income gaps, but higher interest means higher future payments, which will affect how quickly you bounce back after the recession ends. If your business growth slows or stalls, your market share may never recover.

Get Capital Now, While Rates Are Low

Talk to your banker as soon as possible if a long-term loan is in your existing growth plan. Part of getting ahead of a potential recession is securing capital while rates are low.

Lines of credit are much the same as long-term loans. If you foresee a need to bridge intermittent income gaps, or are concerned about periods of lower revenue, secure the credit now while rates are low. This will lessen your future payments and can help keep your business on track through a downturned economy.

If you aren’t sure whether a long-term loan or LOC is what you need right now, consider how you will use the money. With a loan, you borrow the full lump sum up front and then pay it back. By contrast, a line of credit allows you to access the funding if and when you need it, pay it back, and repeat as necessary.

The loan works well if you know how much you need to borrow. If your needs are less structured, then a line of credit offers more flexibility and may save you money in the long run.

Consider Shifting Customer Behaviors

Recessions don’t just affect your business, they affect your customers, too. Consumers are also weathering their own financial challenges, so they may cut back on spending, or stop doing business with you entirely.

Such drops in income would restrict your cash flow and potentially leave you with a glut of unsold inventory. Worst case scenario, it may threaten your ability to keep the lights on and your employees paid. Keeping your employees is vital because hiring during a recession can be equally tough.

Even if the cash flow is enough to keep you running, there could be gaps you need to cover. If you are in a B2B market, your customers are wrestling with restricted cash flows of their own. They may start to slow down their payment schedules (example: Net30 may suddenly become Net60). This will of course further exacerbate your problems.

Prepare For Changes in Vendor Behavior

Do you have vendors you trust and buy from exclusively? Even a small recession could put them out of business, which would leave you without products to sell. Not only have your customers cut back their spending, but now you don’t have the products they expect. They’ll go elsewhere.

Lacking inventory is going to hurt your customer satisfaction, especially if you have bare shelves or lack the most popular and profitable products. If lower revenues affect your ability to pay for products, services, and credit, your local business relationships can suffer. That also puts a dent in future growth plans. 

Have a Plan for When to Spend More

Although it may feel counterintuitive, increasing your marketing budget can actually be beneficial. When you do so, you’re not only attracting new customers, but you also remind existing customers to continue doing business with you. Creative campaigns or special sales help shore up lagging revenues.

Along with marketing, if you suspect that materials or products might be harder to get from your vendors, think about diversifying your offerings. You want to keep product available to customers, and to possibly attract new customers. New products, paired with new marketing campaigns, can ensure your sales funnel is solid.

Unexpected expenses, like equipment repairs, can really shake up your balance sheet during uncertain times. Now is a good time to check existing warrantees or invest in maintenance contracts to ensure you won’t experience extended downtime.

If you need capital to buy new equipment, but it’s not yet in your plans, consider moving up the schedule to take advantage of lower interest rates. While they last.

You can save money and hope for the best. But should a vital piece of equipment break down, accompanied with low revenues and higher loan payments, it’s going to get hard to shell out money for needed maintenance or repairs. 

Shave Expenses and Build a Cash Reserve

If income is lower, it makes sense to keep your expenditures in check. This is good advice all the time, of course. But it’s especially important leading up to, and going through, a recession. See what you’re paying for month to month and find ways to shave down those expenses. If necessary, you can raise prices on some products or services to keep margins at their previous levels.

The last thing you want to do during a low cash flow recession is to have to write off or throw out unsold inventory. Tightening your inventory is also a careful balance of working with your vendors. Talk with them, work out new purchasing and payment terms, and stick to your plan.

Once you lower expenses to maintain or increase profits, start building a cash reserve. Already have one?  Increase it! If you need to cover some immediate income gaps, using a small portion of your cash reserves can help tide you over until credit is secured.

Get Started Now

It’s always the right time to sit down with a trusted financial advisor and discuss a proactive plan to stay ahead of whatever life might throw at you. Even a small recession can have big implications on your bottom line.

Contact Starion Bank today to speak with one of our knowledgeable and experienced business bankers who can help your business succeed, this year and beyond.