Disclaimer: Information in the revenue-based financing articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the revenue-based financing articles often covers financial products that Biz2Credit does not currently offer.

This article discusses:

• What a recession is
• What causes a recession
• How you can manage business debt during a recession
• How a small business loan can help during a recession

Managing small business loans during a recession should be a priority for any business owner. Just as you would want to carefully manage your personal finances so you can meet everyday living expenses while paying your creditors, you’ll want to do the same for your business finances.

The important thing to remember is that a recession is temporary. Except for the Great Recession, historically, most U.S. recessions have lasted less than a year. One day even the slowest economy will be back to business as usual and instead of trying to figure out how to manage business loans or how to pay down debt during a recession, you’ll be more concerned with keeping up pace with the competition and looking for new ways to grow your business.

So what you should you be doing now to manage your small business loans during a recession? Here you’ll learn more about recessions and how to recession-proof your business.

What is a recession and what causes it?

You’ll often hear that a recession is nothing more than a decrease in GDP (Gross Domestic Product) for two or more successive quarters. By this definition, the U.S. is already in a depression. However, many economists are quick to point out that in economics, definitions are rarely that simple, and the fact that we are coming out of more than two years of pandemic disruption should give us pause before declaring an economic recession.

The U.S. has seen 33 recessions over the past 165 years. Officially, when the country is in a recession, the National Bureau of Economic Research (NBER) will make a formal declaration. The organization tracks business cycles and looks for certain indicators, including:

• A slowdown in consumer spending
• A decline in the Gross Domestic Product (GDP) for two or more quarters
• Rise in unemployment
• Stagnant retail sales and industrial production
• Incomes failing to rise with inflation

The presence of these recession signs doesn’t automatically mean that the NBER will decide that the U.S. is in a recession. But if they do, it’s par for the course.

What causes a recession?

There are a few factors that can precipitate a recession. The first is a shock to the economy that has widespread implications.

The after effects of Covid has contributed a lot to our current economic state. Many businesses shuttered their doors at the beginning of the pandemic. Many people became sick, while others worked from home. There was less money going into the economy as retail came to a screeching halt.

These events also led to another factor that can lead to a recession. Consumers began to lose confidence in the economic state of the country. Sometimes when that occurs, people don’t spend as much money.

On the flip side, there were some points during the last two years when people were overspending and it led to a shortage of goods, which also leads to higher prices or inflation.

This led to the Federal Reserve raising interest rates to try and slow demand and spending so that the economy can balance out. By raising rates and making it more expensive to buy things on credit, the Feds are betting that inflation will fall, prices will in turn go lower, and the economy will correct itself.

In the meantime though, the country might have to deal with a recession. The bottom line is that sometimes things get worse before they get better. But eventually, they get better.

How does a business manage debt in a recession?

During a recession, and even before one is formally declared, it’s more vital than ever to be proactive in managing your business debt. Your entire business reputation and credit are at stake.

How you handle your debt obligations will affect your ability to grow your business and access financing when you need it. During a recession, lenders become more reluctant to loan money, particularly to someone whose credit profile isn’t all it could be.

In truth, traditional lenders, such as banks, credit unions, and the Small Business (SBA) Administration, always have rigid underwriting standards that are hard to meet. It can be challenging to get approval for SBA loans or borrow from a bank during the best of times. But they tighten their lending criteria even more so during a recession, so it’s vital to protect your credit record, especially if it’s taken you years to build. Newer entrepreneurs should focus on building their credit profile so that when they need funding, it’s easier for them to qualify.

Thankfully, there are alternative lenders like Biz2Credit who specialize in easier, faster funding when financing with a traditional lender is not likely to happen.

Here are some things you can do to manage your business debt and make your business recession-proof.

You may also like: revenue based funding

Communicate with your suppliers.

There will likely be times when you need a little extra time to pay down your invoices. Suppliers are fairly responsive to those needs to a point. Many will work with you and allow you a little breathing room to let you pay your invoices a little late.

But don’t just skip a month without talking to your suppliers first. Always communicate your needs before making payments that are later than agreed. Otherwise, it could be a strike against your credit.

Some suppliers and vendors have automated payment systems that report late payments to business credit bureaus. You should also be aware that even if you verbally work out a late payment plan with a supplier, their accounting system might automatically send a late notice to Dun & Bradstreet, which would be bad for your business credit. Many vendors, suppliers, and banks will evaluate your credit report from Dun & Bradstreet before extending credit to you.

So communicate with your vendors and make sure the payment won’t be reported late if they allow you extra time to pay your bills with them.

While you’re speaking with your suppliers, it also might be a good time to try to renegotiate terms with them. Some might allow you to temporarily postpone payments for a few months, allow you to make quarterly payments instead of monthly payments, or offer you a better price on goods.

If your vendor is completely unwilling to work with you, it might be time to consider a short-term loan to help with cash reserves so you can meet your operational expenses and have the ability to continue paying your debt. You might even consider consolidating your business debt to a more manageable payment.

Be proactive with other creditors, too.

Most of your creditors and lenders would rather not see you default on your debt obligations. So if there’s a way for them to help, they will.

If it becomes more difficult to pay your debt obligations, it’s of the utmost importance to communicate with your creditors, whether they are a bank, a supplier, a credit card company, or another small business lender.

Your credit card issuer might be able to offer you a low interest card that can replace some of your higher-interest ones. If you’ve handled your debt well, they may even offer you another card that will allow you to consolidate some of your debt. Be aware, however, that rolling over some of your debt is likely to involve additional fees.

A bank or other lender might also be able to help. They may be willing to extend a business line of credit to help you with ongoing business expenses, which might also free up some cash to make your loan payments more manageable. Or perhaps they can offer you a debt consolidation loan.

Consider getting a small business loan, now, before the recession woes hit.

Many factors will determine how hard a recession will impact your business. They include your business’s general financial health, customer base, industry, location, and business model, among other things.

But small businesses are likely to see economic downturns and cash flow problems during a recession. These things are likely to affect your business’s profitability and ability to operate efficiently.

So, it’s wise to consider business financing to help deal with recession pitfalls before it’s here. A business loan can help you adapt to evolving economic conditions better, and it’ll give you the cash flow your business needs when your business has a cash crunch.

If you wait until a recession begins, financial institutions might tighten their small business lending, making it harder for you to get a loan.

A small business loan can also help you buy supplies or inventory, pay employee salaries or operating expenses, or other business needs.

Financing can also help you continue to grow your business. It’s counterproductive to think that this isn’t necessary during a recession. The truth is, it’s more important than ever to focus on improving the customer experience and finding new ways to give them the services or products they want.

You can also use a business loan to renovate your business, reorganize your business debt, upgrade equipment, implement a new marketing strategy to bring in new customers, or open another location.

Perhaps one of the biggest reasons it’s a good idea to secure a loan now is that the interest rates are the lowest they will be for some time. The Federal Reserve has already raised interest rates four times this year. They have hinted that more rate hikes are likely, meaning it’s probably better to apply for a business loan before interest rates rise again.

The important thing is to avoid defaulting on any current or future debt and to have the ability to continue to run your business as usual. A business loan can help you maintain a favorable business credit record or help to build your credit score. That can serve to help you secure future business loans at the most favorable rates possible.

The Bottom Line

Many small business owners today are concerned about today’s economic climate and wondering if a potential recession is looming. While you can’t control what happens in the greater economy, you can do much to position yourself for better success if a recession threatens to temporarily put a dent in your business.

Consider managing your business debt from the outset so you can be better prepared financially.

Put a business plan in place right now in case your accounts receivables are slow to make deposits into your bank account.

Think about consolidating debt into a more manageable repayment plan or take out a business loan to bolster the amount of working capital your business has.

Though there are many financing options when it comes to getting a business loan, Biz2Credit is one of the most highly regarded small business lending providers today. They’ve made business financing easier for more than 15 years and have helped 225,000 small business owners get the financing they needed.

Get a head start on recession-proofing your business and contact Biz2Credit professionals for your fast-funding needs. In many cases, your loan can be approved within one business day.

Yousaf Razzak is glad he reached out to Biz2Credit. He started his restaurant right before the pandemic hit but made the bold decision to expand and with a loan from Biz2Credit, was able to open a new location and found success while many businesses struggled.

FAQs

How to get a small business loan?

When seeking small business loans, it’s essential to consider the following factors:

• Eligibility: Ensure your business is registered and has a clear purpose for the loan, along with a demonstrated ability to repay.
• Credit History: Maintain a solid credit score and positive credit history, which are crucial for loan approval.
• Business Plan: Develop a comprehensive business plan that outlines your business model, financial projections, and repayment strategy, helping lenders assess your ability to repay.
• Documentation: Be prepared to submit necessary legal and financial documents, including tax returns, business plans, and bank statements.
• Addressing these elements can improve your chances of obtaining a small business loan.

How to apply for a small business loan?

To apply for a small business loan, consider the following methods:

• Use the SBA's Lender Match Tool: Enter your loan requirements and create an account to connect with participating lenders. You can then apply directly through the lender that selects you.
• Apply Online: Many lenders offer quick and automated online application processes, allowing for faster responses.
• Apply In Person: Traditional banks may require you to visit a physical branch to complete your application.
• These options provide flexibility in how you approach the loan application process.

How hard is it to get a small business loan?

Securing a small business loan can be challenging, but several options exist:

1. Credit Score: Most lenders prefer a credit score in the mid-600s or higher, while traditional banks may require scores between 690 and 800.
2. Business Age: Lenders typically look for established businesses, but some online lenders may accept operations as young as six months.
3. Business Finances: Strong financials, such as annual revenue of $100,000 or more, are often required.
4. Approval Rates: Approval rates vary, with larger banks approving fewer loans than smaller ones.
5. Funding Options: Businesses with poor credit or startups may face higher interest rates.
6. Alternative Products: If traditional loans are challenging to secure, consider alternatives like merchant cash advances or working capital loans.

What do you need for a small business loan?

To secure a small business loan, you'll need to meet several requirements:

1. Collateral: You may need to provide assets, such as real estate or equipment, as collateral. If payments are missed, the lender can seize these assets.
2. Credit: While lenders review your credit score, the overall financial health of your business is more critical, with many requiring a minimum score of 500.
3. Time in Business: Most lenders require at least two years of operation, though some may consider startups.
4. Cash Flow: Lenders want positive cash flow to ensure timely repayment.
5. Business Plan: Some lenders may request a business plan detailing the loan's intended use.

What is the interest rate on a small business loan?

Small business loan interest rates can vary widely, influenced by factors such as the lender, the type of loan, and the borrower's qualifications. Rates can range from as low as 3% to as high as 99%, reflecting the diverse financing options available. Understanding these factors can help you better navigate your borrowing choices.

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