Is the U.S. headed for a recession in 2025? Some experts say yes, while others say no. Either way, it’s never a bad idea to recession-proof your business finances.
Unlike large corporations, small businesses are more vulnerable to shifts in consumer behavior and market conditions. But here’s some good news: With proactive measures, you can mitigate risks and secure your business for uncertain times.
Recession-Proofing Steps to Take Now
Get prequalified for business loans.
“Every business starts as a dream, but it needs capital to nurture and grow,” says Raj Tulshan, founder and managing member of Loan Mantra. He emphasizes the importance of pre-qualification for business loans while lending conditions are more favorable. Many businesses wait until they face cash flow issues to secure loans, but this reactive approach can lead to higher costs and limited options.
Platforms like Loan Mantra simplify the process by allowing businesses to apply for loan pre-qualification online. They also match borrowers with lenders who best fit their needs, ensuring access to capital when it’s needed most.
Clean up business credit.
Your business credit score can significantly impact your ability to secure loans at favorable terms. To prepare for a potential recession, Tulshan recommends:
- Reviewing your credit report regularly for discrepancies.
- Making all credit payments on time.
- Reducing debt-to-credit ratio below 50%.
A clean credit history not only builds your financial credibility but also broadens your funding options.
Save cash to build resilience.
Cash is king during times of economic uncertainty, according to Tulshan. Maintaining a robust cash reserve allows you to tackle unforeseen challenges without compromising operations. Start by:
- Reserving a percentage of monthly profits.
- Cutting unnecessary expenses.
- Diversifying revenue streams to ensure consistent cash flow.
Manage inventory efficiently.
Inventory mismanagement ties up capital that could be better utilized elsewhere. Instead, implement just-in-time inventory practices or focus on high-margin products. Clothing retailer Bonobos, for example, adopted a concierge model to minimize on-site inventory, enhancing efficiency while maintaining customer satisfaction.
Operational Adjustments to Recession-Proof Your Business
Focus on core business strengths.
“The biggest mistake a small business can make during economic slowdowns is to cut or alter their core business or product,” notes Tulshan. “We’ve seen this happen a few times. A business owner panics and cuts or changes the very reason that their customers remain loyal to them.”
Instead, concentrate on the areas where your business excels and aligns with customer demand. For example, if your restaurant is known for its Margherita pizza, don’t replace it with a cheaper alternative to save costs.
Review and reduce expenses.
Take a hard look at your current expenses and identify areas for adjustment. Small changes like reducing utility costs or renegotiating supplier contracts can add up over time. For example:
- Eliminate redundant software subscriptions.
- Consolidate expenses like deliveries or office supplies.
- Opt for remote or hybrid work models to save on overhead.
Reduce time on non-revenue generating tasks.
Analyze your daily operations and identify tasks that do not contribute directly to sales or profitability. Can some of these processes be automated or outsourced? For instance, AI tools can help with back-office tasks like bookkeeping, freeing up resources for customer-facing activities.
Recession-Proofing Your Customer and Supplier Relations
Maintain good customer relationships.
Remember, customers also feel the pinch of a recession. Offering flexible financing options, such as installment payments, can encourage continued loyalty. Transparent communication about pricing or policy changes during tough times also fosters trust.
Tulshan suggests exploring white-label financing options to provide customers with lower interest rates and manageable payment plans through your business. This creates a win-win situation, benefiting both your cash flow and customer retention.
Build strong supplier partnerships.
Suppliers can be valuable allies during a recession. Open lines of communication and seek to negotiate better payment terms, bulk-buying discounts, or cost reductions. Having a solid relationship with suppliers may even give you priority access to scarce inventory items during supply chain disruptions.
Financial Planning Tips and Loan Products for Recession-Proofing
Plan for future capital needs.
Capital access becomes limited during economic downturns. By forecasting your future financial needs and securing funding in advance, you can maintain liquidity even when credit markets tighten. A loan management platform like Loan Mantra’s BLUE can streamline this process through its secure, easy-to-use system, allowing borrowers to upload their documents once and access multiple funding opportunities.
Diversify loan options.
Beyond traditional banks, consider alternative funding sources like:
- Community Development Financial Institutions (CDFIs): These cater to underserved markets and often offer lower lending rates.
- Small Business Administration (SBA) loans
- Grants or state-based small business programs
The key is to diversify your options so you’re not overly dependent on any single lender.
Strong Foundations During Uncertain Times
If you recession-proof your business finances now, you can weather whatever downturns come your way. Start by securing your financial foundation through loan prequalification and credit improvement. Then, optimize your operations by focusing on core strengths and reducing inefficiencies. Finally, strengthen relationships with customers and suppliers to maintain stability.
