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Business loans and recessions: What you need to know

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Business loans and recessions: What you need to know

Updated: October 9th, 2023

Business loans and recessions

Business owners are no stranger to weathering economic challenges—and the next one on the horizon could be a recession. Citing high inflation, rising gas prices, and a slowing economy as primary risks, CNBC recently said the odds of a recession happening in the next 18 months are greater than 50%

Business owners across all industries are concerned. In fact, eight in 10 small business owners surveyed in CNBC and SurveyMonkey’s Small Business Index Q2 2022 said they expect a recession to happen later this year. 

Of course, you can’t predict with certainty when a recession will occur, nor can you predict exactly how long it will last or how it will affect your business. But you can get prepared. The first step: educating yourself on your financing options

What does a recession mean for business financing? 

A recession, which is defined as a significant and widespread decline in economic activity, inevitably influences the lending world. Here’s how: 

  • Interest rates usually decrease: Interest rates for business loans tend to go down during recessions. The Federal Reserve lowers rates in an effort to stimulate the economy by making it more affordable to get a loan.  
  • Credit requirements can increase: When economic uncertainty is high, lenders may become more cautious, raising their credit qualifications. If you don’t have a stellar business credit score or strong cash reserves or collateral to back you up, it might be harder to get approved for a loan during a recession. 
  • Lenders may process fewer loans: For a variety of reasons, lenders might end up processing a lower volume of loans during a recession. Traditional financial institutions like banks may not want to approve long-term loans at hyper-low interest rates if, for example, The Federal Reserve is anticipating an upcoming rate hike. 

5 reasons to get a business loan now

A recession can impact your business in a number of ways. How and how much you’re affected depends on your industry, business model, customer base, location, and financial health. In general, though, small businesses are vulnerable to sales slumps and cash crunches during recessions, both of which can strain your resources and pinch your profits.

That’s where small business financing comes in handy. Here are five reasons to consider getting a business loan now—before a recession is underway:

1. Give yourself more flexibility

When the economy slows down, you need to be able to adapt. More cash flow means more options. With a business line of credit, you can access funds whenever you need to without scrambling or tying up all your available cash. 

The main appeal of a line of credit is that it’s flexible in nature. You can dip into your credit any time—and you only pay interest on the funds you draw. Making regular repayments can help boost your business credit and increase your fund limit. 

You can use a line of credit to:

  • Order inventory 
  • Purchase extra supplies and materials 
  • Prepare for busy season
  • Keep up with customer demand 
  • Pivot operations 
  • Pay ongoing operating expenses 
  • Make payroll if your accounts receivable are delayed

2. Invest in your business’s longevity

It’s always smart to invest in your business’s growth, but it’s especially crucial ahead of a potential recession. If you can improve your business model and customer experience now, you’ll be in a better position to stay stable and profitable in the face of economic difficulty. 

A business term loan can give you the upfront capital you need to tackle growth projects or take advantage of exciting opportunities. Unlike a line of credit, with a term loan you borrow a set amount of money for a set period of time, then make monthly repayments. 

Here are just some of the ways you can use a long-term business loan: 

  • Renovate your business space
  • Invest in new technology 
  • Update your equipment
  • Revamp your business website 
  • Improve your customer service 
  • Purchase inventory in bulk
  • Open a second location
  • Expand your marketing strategies

3. Take advantage of lower interest rates

Interest rates are always in flux, especially during times of economic uncertainty. The Federal Reserve recently hiked its benchmark interest rate 0.75%, marking the biggest increase since 1994; and more hikes are expected this year

Business loan interest rates tend to follow the benchmark interest rate, which means interest rates for loans across the board could increase. If you apply for a business loan sooner rather than later, you could end up saving a lot of money in interest payments, particularly if you get a fixed-rate loan. That extra cash flow will be essential if a recession slows down your sales or forces you to cut costs.  

4. Reorganize your debt 

If you already have business debt, now’s a good time to consider restructuring it. Refinancing—replacing an existing loan with a new loan—can help you score a lower interest rate or a smaller principal payment. With a lower rate, you can put more money toward paying off your loan; with a smaller principal payment, you have more cash flow to stabilize your business operations. 

Debt consolidation—which combines multiple loans into one single payment—is another helpful option. If you’re overwhelmed juggling multiple loans, or if the scattered payment schedule is causing you to miss monthly payments, consolidating your debt can streamline the payment process and help keep you on track. 

5. Improve your business credit score

A higher business credit score means a greater chance of getting approved for loans—and getting more favorable loan terms. If credit requirements tighten during a recession, having a stronger credit score can open the door to more financing options. 

One way to boost your business credit score is to make timely payments on a loan, line of credit, or business credit card. However, it’s also important to take other steps, like keeping your credit utilization ratio low and updating your credit profiles with major credit bureaus. 

Other ways to recession-proof your business 

Preparing your business for a potential recession is a valuable use of your time and resources. The more proactive you can be now, the more confident and decisive you’ll feel if and when there’s an economic downturn. 

Here are just a few ways to recession-proof your business

  • Prioritize customer satisfaction: Customers keep your business open, so it’s vital to invest in their happiness. Start by sending out a survey and reading your online reviews, then brainstorm actionable changes you can make. Think: offering free or discounted shipping, adding a chatbot to your website, or starting a customer rewards program. 
  • Diversify your revenue streams: If you haven’t already diversified your revenue, it’s time to get creative. Can you turn one of your services into a product, for example, create a membership model, or lease out part of your business space? 
  • Keep marketing consistent: Now’s not the time to slack on your marketing plan. Consistent, strategic marketing keeps you top of mind for customers and helps draw in new prospects. In addition to doubling down on foolproof tactics like email campaigns and social ads, consider trying new avenues like micro-influencer partnerships or videos.   

Get a business loan with Funding Circle

Flexible financing can help strengthen your business before, during, and after a recession. If you’re curious, consider getting a loan with Funding Circle. Our business term loans give you affordable upfront capital, while our business lines of credit offer ultimate flexibility. 
You can apply in just a few minutes and get funds in a few business days if you’re approved. Learn more about us or apply today.


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