Business is good. Taxes are lower. Regulations are down. With these macroeconomic indicators being positive, it is hard to have a negative outlook on the economy. You want to continue to hire employees and expand production to meet your increasing product demand. I don’t want to rain on your parade, because I am one of you, but as entrepreneurs and risk takers, we need a modicum of preparation in case of an economic downturn.
It has been over a decade since the last recession, which crippled many small businesses. The day doesn’t pass where an economist doesn’t warn of a downturn. Have the entrepreneurs learned from the events of the Great Recession? According to a new poll by BlueVine Opens a New Window. in partnership with Researchscape Opens a New Window. , the answer is, sadly, no. Of the 1,000 U.S. small business owners surveyed, 44 percent have not taken any steps to prepare for a possible recession.
According to the Federal Reserve Bank of New York, “Although both large and small businesses felt the sting of job losses during the 2007-09 downturn, small firms experienced disproportionate declines. A study of the recession’s employment effect on small firms suggests that poor sales and economic uncertainty were the main reasons for their weak performance and sluggish recovery—problems that affected large firms too, but to a lesser degree. Although a tightened credit supply constrained some small firms, weak consumer demand for the firms’ products and services was a more pressing factor, reducing revenues and dampening new investment spending.”
You can’t blame small businesses for not wanting to slow down. The macroeconomic environment is firing on all cylinders. In July, the U.S. economy added a fairly modest 164,000 jobs Opens a New Window. . The unemployment rate remained steady at 3.7 percent, near a 50-year-low, while average hourly earnings have increased by 3.2 percent, falling somewhat short of expectations.
Remember that cash is king, and having available working capital in anticipation of a recession could end up saving your business. Many small businesses operate on a tightly controlled cash flow because they don’t typically have large cash resources available to them. As the money comes in, it goes out. If a payment from a customer is late, it puts the entire business cycle in jeopardy. Couple this with fake news hysteria and the downward spiral begins.
BlueVine CEO Eyal Lifshitz was surprised when he heard people were not financing in a time where the economy is strong, especially with the threat of a recession. “Small businesses should be taking time now to prepare their business while the economy is still strong, particularly when it comes to getting the right financing to withstand any economic condition,” Lifshitz said.
Perhaps if the next recession hits, it will find financing more available with the advent of Fintech. Financing of this type was in its infancy in 2007. Now, however, it is changing the landscape of how small businesses access the capital markets. Tired of forms and waiting at a traditional bank, only to often be turned down, venture capital is betting on the American entrepreneur via Fintech financing. Hopefully this will be a win-win for both should the economy head south.