Financial Clarity for Entrepreneurs

Surviving, And Thriving, In A (Possible) Recession

This is Part 1 of a planned series on managing your business during a recession.  Subsequent parts will be linked at the bottom of this post as they are published

I don’t have a crystal ball or some special insight into the macro economy that allows me to say we’re in the beginning of a recession.  The classic definition of a recession is two consecutive quarters of negative GDP growth, and since most recessions are short-lived, we often don’t know for sure that we’ve been in one until it’s over.

What I do know is that how people will react to the possibility of a recession has many of the characteristics of a recession – and can even bring one on .  Now is the time for judicious management, and if not actually growing now, at least laying the foundation for significant growth during the recovery.  Whether we experience an actual recession or just a perceived one, there are things you can do to protect your business and even make progress during turbulent times.

Cash is King – Don’t Let Your Customers Keep Yours

This is always good advice no matter the macro environment, but during a recession it’s doubly important.  When businesses sneeze, their vendors are often the first to catch a cold.  Delayed payments become common and bad debts increase.  You don’t want to be the vendor left holding the bag.

If you begin to have customers and clients who used to pay on time but now don’t, it’s a good sign they’re experiencing difficulty.  Many will try to ride out hard times by borrowing to fund operating deficits – borrowing from vendors through increased A/R and stretched-out payments, borrowing more on lines-of-credit, maxing out on credit cards.  As soon as you see this happening with a customer, you must be pro-active.  Waiting will just get you stuck at the back of the line and you may never get paid if your client goes bankrupt.

Here are three things you should do right away with slow payers:

  • Lower their credit limit with you, and/or
  • Put them on COD.
  • Intensify collection efforts and don’t let up until you get paid.

Awhile back I did a series on 15 Things You Can Do To Get Paid Faster.  Now would be a good time to read it and implement some or all of the suggestions.

Restructure Your Borrowing

The Federal Reserve has been on an interest-rate-lowering tear lately, but it can’t, and won’t last forever.  Inflationary pressure and the weak dollar will force the Fed to raise rates again as soon as they feel the danger of a recession has passed.

Take advantage of the current situation and look at your business borrowings to see if you can lower your interest expense and/or stretch out payment terms to preserve cash flow. 

Specifically:

  • If you’ve used a first or second mortgage to finance your business, look into re-financing to lower your interest rate, and/or
  • If you’ve used a HELOC (home equity line-of-credit) to finance your business, consider a re-fi into a fixed-rate, fixed-term mortgage to lower your rate and stretch out payment terms.
  • If your financial situation is still strong, consider obtaining a fixed-term working capital loan (the SBA has some good options) to pay off higher interest rate credit cards and unsecured lines-of-credit.
  • Take advantage of credit card offers with zero-interest balance transfers.

If you haven’t sat down with a good banker in awhile, now would be a good time to do so.  Tell them you want to restructure your business borrowing and see what they can do for you.  You’ve probably heard about a "credit crunch," but I’m not seeing it in the small business lending arena.  Banks are still lending money to quality businesses.

In Part 2 I’ll be concentrating on Cost Control – the right way.  In the meantime, go collect some overdue A/R!

Here’s the link to Part 2 – Cost Management and the link to Part 3 – Marketing.

 

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