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How Does a Recession Affect a Business?

Understanding what a recession is and how it might affect your business is the first step in demystifying it. Once you understand that it’s a feature of any economy, you can make a plan of action.
How Does a Recession Affect a Business?

If you think of the word ‘recession’ you probably associate it with a bad economy and, as a business owner, it likely makes you a little bit nervous.

Understanding what a recession is and how it might affect your business is the first step in demystifying it. Once you understand that it’s a feature of any economy, you can make a plan of action.

What is recession in business?

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Generally speaking, the recession business definition is categorised as a period of negative economic growth. Because this can happen at any point, in the European Union and the USA, a recession is officially defined as two consecutive quarters of negative economic growth adjusted for real GDP.

Recessions don’t always last for years, they can last for a matter of months too. Historically in the UK there have been just three periods of recession last a year or longer since the end of the Second World War.

The last recession in 2008/2009 was one of the longest, lasting five quarters or 15 months.

How does a recession affect a business

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While recessions don’t necessarily drag on for long periods of time, the impact of recession on businesses can often last for much longer, even if the economy is in a period of growth.

The primary effect of a recession is that you could make less money. This has many knock-on effects as you will need to make changes to try to stimulate growth and profit. This can include cutting costs by switching suppliers, no longer investing in new products or services, reducing how much you spend, or even making employees redundant or enforcing a hiring freeze.

A recession also means that you could not have easy access to credit. Otherwise known as a credit crunch, it occurs because banks start lending cautiously, only doing so to businesses and individuals it can guarantee will repay loans. This subsequently means that you are less likely to receive preferential rates, thereby increasing your bills.

A common aspect of cutting costs is often reducing the quality of goods. If you’re a manufacturer this will directly impact your profits as other businesses look to save money. It could also extend to the components you use for your own service or product, thereby reducing the quality of your output.

You may also find that your cash flow reduces as customers delay making payments or purchases. This will take close management and will likely spark a chain reaction to other businesses.

Finally, you might see the demand for your products or services decrease. This is simply because people aren’t spending as much money. If you’re a business to business seller, this can have a particularly difficult effect as if one of your customers go out of business, they may not be able to pay you what they owe you on top of an obvious reduction in demand for your goods.

Positive effects of recession on business

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While a recession is largely a negative force, there are a handful of positives however these often each have their own downsides.

As unemployment rates rise, you could find that workers become more productive in order to keep their jobs. This often comes at the expense of morale though, as a smaller workforce may be required to work longer hours for the same wage.

Recession is always the cure to high inflation. This means that prices, including your own, will drop.

Recessions could also cut your competition as businesses are unable to remain trading. If you make it through a recession, that’s a strong indicator that you’re running your business the right way.

A final positive effect of a recession on business is that borrowing rates remain low. While you may find it harder to be approved for loans, the interest you repay should be minimal. This is because the Bank of England set the base interest rate (the minimum interest rate) in order to stimulate and encourage borrowing and investment. This means that your loan repayments will be lower, but equally any savings you have won’t grow from interest alone.

Always have a plan of action

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Recessions are a natural part of the business cycle. While they may be daunting and difficult at the time, they are always followed by a period of economic recovery and growth.

It’s sensible to make a plan while your profits and the economy are healthy. If you do that, your business is more likely to ride the tide of economic uncertainty which stands you in good stead for your future.

How could Esme Loans help?

Here at Esme Loans, we offer unsecured business loans from £10,000* to £250,000 that can be repaid over a 1 to 5 year period. For more information on our business loans and how to apply, click here.

* From £25,500 for Sole Traders