- How can we predict a recession?
- Why am I hearing that there will be another recession soon?
- What can I expect from my business financing during a recession?
- How do I best prepare for a recession?
How can we predict a recession?
Well the short answer is that we really can’t. We can read economic headwinds and recession-proof our business, but most economists struggle to pinpoint when a recession is likely to hit. Recession indicators give a time range between 2 and 16 months before a downturn.
Why am I hearing that there will be another recession soon?
There are some economic indicators that typically precede a recession. The Federal Reserve announced a cut in the Fed Funds Rate at the end of July. This is to help the economy keep trucking in the wake of uncertainty. The implication of an inverted yield curve is that investors have more confidence in long term yields than short term. In other words, investors expect an economic downturn and choose to invest longer term with lower yields. Additionally, a trough in the unemployment rate commonly occurs before a recession. We are seeing the traditional signs of a recession, so it is wise to prepare for it sooner than later.
What can I expect from my business financing during a recession?
Lenders are less likely to extend credit to businesses during a recession. Even after the recession period is over, banks are less inclined to lend to small businesses. In 2011, less than 10% of small business loans were approved by big banks (Biz2Credit Small Business Lending Index). Online lenders that filled the void left by these lenders gained popularity following the 2008 recession, albeit at high interest rates. Business owners should secure lower rates on their financing before a recession, if possible. If that financing runs out, alternative financing options like invoice factoring are steady sources of business funding in economies good and bad.
How do I best prepare for a recession?
The most important step to preparing for a recession is to secure a business financing option before it is too late for your business. Lines of credit that are ‘pay as you go’ or accounts receivable funding that lends against your aging receivables offer your business flexibility to weather a recession.
In short, there is no accurate method of pinpointing an impending recession because it relies on a multitude of factors, but there are indicators that give business owners a heads up. Improving your cash flow now and maintaining strong cash flow is key to weathering a recession. Monitor your debtors and the payment you are due for your goods or services. Understand your business financing and how it may change during a struggling economy. With the right measures taken before a recession, your business can dominate your industry during and after the recession.
For more on the topic of an upcoming recession and how to protect your business, see CEO Ian Varley discuss this on #TheMoneyFactor.