Recessions, or even the fear of a possible one, can have a significant impact on business owners in two ways: they can reduce sales and revenue, and if the business lacks scale, market power, or financial leverage, they can limit the resources available to help a business owner weather a tough economic.
As a result, before to, during, and after a depression, many small business owners turn to money lenders. Small company loans peaked at 14 million in 2007, right before the Great Recession, according to the Federal Financial Institutions Examination Council.
What Should a Borrower Expect During a Recession?
It is a typical economic condition that occurs after periods of expansion or large-scale occurrences.
If the economy enters a recession in 2023, the possibility is 96%… or 25%, depending on how you look at it—it will come after a time in which both growth and large-scale events played a role. What evidence do we have? Because economies have a natural cycle of acts (recessions) followed by reactions (growth).
For example, an 11-month recession could result in 67 months of growth. It could also lead to more. Remember that the last one in the United States ended in 2009. The economy increased at a 2.3% annual rate from mid-2009 and 2019, according to the Center on Budget and Policy Priorities (CBPP). That’s a really long time.
Still, there are several obstacles to overcome as a borrower during an economic downturn:
- Tighter Credit Criteria: To prevent financial risks, lenders frequently increase loan criteria during a recession, making it more difficult for businesses without excellent credit, cash reserves, or collateral to qualify for loans.
- A Drop in Your Credit Score: During a recession, borrowers’ credit scores normally fall, as cash flow concerns make it difficult to pay off their loans.
- Less Available Capital: Because of the risk and unfavorable interest rates, banks and other lenders may process fewer loans during a recession.
Using Business Financing During a Recession
If you need to borrow money, whether to expand, acquire a neighboring business, or simply pay your employees and keep the lights on, how you use the money is obvious.
However, if you’re borrowing to protect yourself against the potential of having to travel to a mission-critical location, you have a few options:
- Invest the funds and earn enough to cover the installments plus interest.
- Reinvest the funds in your company.
According to John Quelch, Dean of Business School at the University of Miami, “investing in your business during a recession while competitors are cutting back can yield a greater ROI at a lower cost than investing in your business during good times.”
This could be improving your equipment to make it more efficient or extending your product, expanding your footprint to serve more consumers, acquiring a rival to increase your customer base, or growing your personnel to improve customer service.
In other words, if you have a plan for the funds that you believe in and are confident in your ability to execute, don’t let “recession” stand in your way. If you’d rather hear it from someone else, consider Jon Huntsman Jr., the former Governor of Utah and US Ambassador to China, who said, “Economic recovery must be earned, and it will be earned by entrepreneurs and small businesses.”