It’s time to start preparing. The stock market’s most well-known recession indicator—the inverted yield-curve—indicates there’s trouble ahead. This is especially the case for small businesses that are trying to get financing before a recession hits.
That’s because an inverted yield curve typically implies, as CNN Business’ Julia Chatterley states, investors are getting paid better to lend money for a shorter period of time (a two-year Treasury note) than a longer period of time (such as the 10-year Treasury), even though the opposite is usually true since a longer-term investment typically are riskier and pay out better returns.
Right now the opposite is happening. Spreads are between the 10-year Treasury yield, which is typically a benchmark, trading under it’s two-year Treasury counterpart. That’s created a 30-year rate under 2 percent. Its lowest level since 2007.
For many in the investing sector, as well as businesses across the U.S., that means major warning bells sounding an alarm that a recession is pending.
To better prepare, here’s what Howard A. Tullman, executive director of Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship at Illinois Institute of Technology in Chicago, suggests doing when it comes to preparing your small business and financing before a recession hits.
Consider Increasing Your Credit Line.
Many small businesses were hindered by their inability to secure bank credit before the financial crisis of 2008. In the years following the recovery, access to credit and lending to small business lagged behind, according to the National Federation of Independent Businesses.
A survey done by The Federal Reserve of Senior Loan Officers found credit standards for small-business borrowers increasingly squeezed through October 2008.
That’s why having the right access to capital is essential for the long-term survival of any business. As is maintaining the proper amount of funding and cash flow.
It’s important to be strategic about it.
While some business owners many borrow to increase their cash flow, Tullman says don’t borrow in order to finance speculative expansions or new undertakings in this type of economy.
Instead, be smarter, more prudent about what you do.
Tullman recommends small business owners rely on “real cash” that is available; but also consider increasing their credit line, Tullman says, “especially if there’s no cost in doing so.”
Slow Down Payments as Part of Cash Flow Plan
Slowing down payments isn’t something most business owners like to do. But sometimes being more strategic with how you manage your cash flow can make a big difference.
It’s important not to mismanage strategic relationships that can be key, especially during a recession.
“If you can defer or slow down your outbound cash payments on debts you owe without jeopardizing the long-term relationship, then that’s a wise plan, Tullman says.
“Big businesses make slow paying a part of their cash flow management all the time. Small businesses shouldn’t be too proud to do the same thing.”
Increase You Cash in Reserve
When it comes to creating an emergency fund, more is always better. As a recession approaches, owners should think about their cash flows and the amount of money they hold in reserve. Unfortunately, one size doesn’t fit all.
“There is no simple rule of thumb. It all depends on the type of business and the size of the business as well as the nature of the typical cash flow,” Tullman says.
Since we might be going into a tough economy, it makes sense to have 3 to 6 months of payroll and payroll taxes in reserve, says Tullman. You should also shoot for 3 months in reserve of what your other payables are based on an average month.
SCORE, a volunteer network of business mentors recommends looking at your monthly cash flow report to provide historical and seasonal perspective, determine the cash received from sales versus the cash that was spent for your “net burn rate.”
Then determine how much cash you plan to use in the next 12 to 15 months. Create a financial forecast or look at the financial section of your business plan if you’re a start-up.
Defer Discretionary Expenses, Focus on Retention
For now, consider deferring discretionary expenses, Tullman says. Especially ones related to marketing and new customer acquisition costs.
Instead focus on retaining customers. Tullman says too many businesses take their current customers for granted. That retention is important and “a lot better investment in tough times than trying to recruit new customers,” he says.
Instead commit resources and people to getting the job done to ensure your current clients are happy.”
Move immediately to protect and secure the people presently in the boat–existing customers are the most accessible, nearest to reach, and hopefully the easiest to hang on to,” Tullman says.
That means anticipating your customers’ needs so you are being proactive instead of reactive. Focus on customer quality and loyalty, not merely quantity, Tullman says, to build up the right clientel.
“The smartest business builders will tell you that not all customers are equal in value or importance. Even if they’re not ‘bad’ customers,” Tullman says.
Then when the recession hits, “hunkering down and making plans to hang on to the customers you have is the smartest option right now,” Tullman says.
Other Advice – Lock-in Rates When the Interest Rates Are Lower
When the Federal Reserve lowers interest rates, as they did in July, it’s usually an indicator the economy is leaning towards a recession. That’s because interest rates are usually raised when the economy is improving. When the economy is slowing down, the Fed cuts interest rates. This is to encourage borrowing in the hopes of spurring on the economy.
“The best time to borrow long-term money is when the Fed stops aggressively lowering rates; however, this is not easy to time, because it can take many months to attract a private lender, and banks are not always willing to commit to long-term loans at low rates when they expect rates to rise in the near future,” says Victoria Duff of the Houston Chronicle.