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How Small Businesses Can Prepare for a Recession

Although it may not be something entrepreneurs want to think about, the dreaded R-word is looming on the horizon. Between supply chain issues, the continuing inflation we’ve all experienced, and the significant spikes in the Federal Reserve interest rates, the economy is inching closer and closer to a true recession.

So what can you do to make sure your business is strong enough to weather the storm? The secret to surviving a recession as a small business owner is being prepared before one affects your company. Here are a few strategies to implement now to recession-proof your operations:

Build up a Cash Reserve

During a recession, cash is king. Having cash on hand provides you with flexibility and ensures you can withstand a period of reduced sales. Being undercapitalized and not having the cash to maintain operations and be able to grow is the #1 reason small businesses fail. A good rule of thumb is to try and build up a cash reserve to cover roughly 6 months’ worth of operating expenses.

Diversify and Adjust

When the economy is in a downturn, it’s important to be creative and adaptable. Brainstorm ways to adjust your product and service offerings to better fit the current needs of your customers. You may need to modify your business model, discontinue selling certain product or services that do not generate a high enough profit margin, or offer new, more affordable options.

Secure a Business Line of Credit

A business line of credit allows your business constant access to emergency financing to use on an as-needed basis. You can use it when sales are slow, if an unexpected expense arises, if you need funds to stock up on inventory, or if you’re struggling to meet payroll. Any time cash flow is tight, a business line of credit will allow you to have immediate cash at your fingertips. Having access to financing during an economic downturn is one of the key factors to helping your company not only weather the storm, but also to come out of it thriving.

Keep in mind that the best time to secure a line of credit is when business is booming, so it’s a good idea to get qualified now before a recession hits. You’ll get the benefits of more favorable terms, plus you’ll be able to secure a higher amount of available credit. A line of credit is like a financial safety net for your business. It’s there if you need it, but you’re under no obligation to use it.

Optimize Your Inventory

In order to withstand a recession, you need to have the perfect amount of inventory to serve your customers. Having too much slow-moving inventory in stock takes up space and eats away at your cash flow. On the other hand, having too little inventory could result in lost sales. That’s why it important to focus on forecasting your inventory before the economy takes a downturn. Consider all possible variables, scenarios, and trends, as well as seasonality.

Based on the recent global supply chain disruptions, you may want stock up on slightly more inventory than you think you’ll need in order to be better equipped to handle the impending recession. In addition, now is the time to seek out alternative suppliers to partner with. Having a broad network of suppliers will help you secure the products or materials you need to run your business in the event that your current supplier can’t fulfill your order or becomes heavily impacted by the recession.

Having Adequate Capital Can Help Prepare Your Business for a Recession

Interested in securing a line of credit or need help identifying the best financing strategy for your small business during these challenging times? Contact us today at (855) 784-0008 or apply today to get started!