An uncertain economy is challenging for any business, and in particular small businesses. According to our Small Business Indices report, small businesses experienced a decline in their payment performance and credit utilization during the 2020 pandemic-induced economic downturn. This report highlights the need for small businesses to prepare for  market volatility by getting their house in order.

How to Prepare

One way small businesses can prepare for a recession is to make a budget and stick to it. This might sound obvious, but it is essential to review your business expenses and revenue regularly to identify areas where you can cut costs and optimize your operations. By setting a budget and following it, you can ensure that your business remains financially stable during unstable economic markets.

Another critical factor for small businesses is to reduce debt as high levels of debt can make it challenging to manage cash flow during tough times. Small businesses can reduce their debt by renegotiating payment terms with their creditors or by consolidating their debt into a single loan with lower interest rates.

In addition to reducing debt, small businesses should increase their savings. By building up cash reserves, small businesses can weather financial storms. This strategy enables businesses to cover their expenses and continue their operations even if revenue decreases.

Of course, these suggestions are often easier said than done. If resources have been exhausted, there are still ways to shore up your foundation.

How Smart Data Can Help

Small businesses can increase efficiency and save money by leveraging technology - specifically, automation.

Automation can streamline the lending process, reducing the time and cost associated with manual underwriting. Furthermore, automation can help small businesses offer more personalized and flexible loan products that meet the unique needs of their customers.

Improving credit decisioning and reducing fraud are also essential, and data and analytics can be utilized by lenders to assess risk and analyze customer behavior. Business credit reports are an excellent resource, and Equifax offers a Business Credit Report for Small Businesses  so lenders can make informed decisions about whom to do business with and how much credit to extend.

How to Weather the Storm

To prepare for fluctuations within the economic landscape, small businesses should focus on strengthening their financial management. Another way to think of a recession is a business cycle contraction, and small businesses need to ensure they have access to credit to survive. By staying on top of their finances, small businesses can identify potential issues before they become major problems.

Lenders can focus on building business agility through capitalizing on ripe revenue opportunities, optimize customer treatments, and react to potential delinquency indicators. Staying nimble but in control is critical, and both lenders and small businesses need to be prepared with ready-to-deploy treatments or decisioning shifts to react to in-the-moment information as circumstances arise.

Preparing for financial strain is not ground-breaking advice, but it is essential for small businesses to get their house in order. Making a budget and sticking to it, reducing debt, increasing savings, leveraging technology and automation, improving credit decisioning, reducing fraud, enhancing customer experience, assessing risk, and analyzing data are all critical steps small businesses can take to prepare for any economic downturn.

By focusing on moving forward through sound financial management and building business agility, small businesses can weather the storm and emerge stronger on the other side.