Borrowing During a Recession: Is Your Small Business Prepared for the Future?
- June 5, 2019
- By Aidan Dwyer
It is inevitable: what comes up, must come down. The U.S economy constantly goes through high and low phases that generally last between 1 and 3 years. But since the recovery from the 2008 housing market crash. The U.S economy has been steadily growing, and some wonder when this phase could end. We are overdue for a recession by about 4 and a half years. Which, in turn, could mean a longer than average recession period once it hits. Economists predict the U.S will enter a recession period by as early as 2020. Whether we are prepared is the question that arises in every business owner’s mind.Â
Understanding the Impact of A Recession
A recession, no matter how mild, can have a huge impact on small and medium-sized businesses. Many businesses will experience a drastic drop in their bottom line as their customers pull tighter strings on their spending. Businesses may also be concerned about borrowing money and gaining capital that they may desperately need. They fear their business may slow. Also, they think they will not be able to cover the interest payments on the working capital they have borrowed. Fear not, there is a way for smart business owners to manage borrowed money and survive through the recession. There is also a way to use the low rates to their advantage and prosper as the economy recovers.
To understand how smart business owners get ahead of the game. You first have to understand why the Federal Reserve raises and lowers interest rates. The answer is simple. The Fed raises interest rates to discourage borrowing when there is a fear of inflation. Also, the Fed lowers them to encourage borrowing to recover from a recession. This is important to the timing of when you secure business financing. As a recession approaches, the Fed has been aggressively lowering rates. So that borrowing will look more attractive towards business owners. The problem is that lenders will not necessarily be willing to finance long term loans at low rates. Because they may expect that rates will rise again. With the current state of the economy, the optimal time to secure a long term loan is now.
Through the Inevitable: Securing Working Capital for Your Business
The way in which businesses can take advantage of borrowing during a recession; is by securing long-term, low rate lending deals. This allows the business to gain capital at a low enough rate. So that they will be able to make interest payments during the recession. Then as the economy begins to recover and the business is seeing more revenue. They can continue to use the remaining capital to expand and grow. At the same time, they can off the long-term, low-interest rates. The key to this is to secure funds when the Fed sets aggressively lowered interest rates, such as right now! With good financing, you can secure enough capital to get your business through the recession. That too even after having enough to grow your business after. You can invest the capital. Your business doesnâ€™t need immediately in fixed-income investments that will help offset your interest payments.
There are a few long-term working capital options that will suit best for getting businesses through recessions. The best option is an SBA loan. Which is a 10 year, low-interest rate loan support by the Small Business Association. Not every business will qualify for an SBA loan. But there are other options such as a Term Loan or a business line of credit. To find out which financing option will suit your business best. You can browse our resources below. Also, if you want to hear the options specific to your business, give us a call!