The next recession isn’t a question of ‘if’—it’s ‘when.’ Companies that gain ground during downturns have one thing in common: they are already preparing.

On average, the U.S. experiences a recession every five to seven years, typically lasting for a year or two, followed by a longer recovery. 

Mark Zandi, Chief Economist at Moody’s Analytics, recently warned that over a third of the US economy is already in recession, and he calculates the odds of a widespread economic downturn within the next year at 49%. 

Of course, this is an estimate. As Paul Samuelson once remarked, “Wall Street indexes predicted nine out of the last five recessions.”  Despite the difficulty in predicting when the next recession will occur, few economists would dispute the notion that – eventually – we will have another recession. 

Small Businesses Are Hit Harder

Small businesses tend to fail at a higher rate than large businesses, even in the best of times. And when the economy goes into a deep recession, small businesses are hit harder than large enterprises. 

Preparing now gives you the best chance to survive, potentially even positioning you to gain ground while unprepared competitors struggle.

6 Ways To Insulate Your Business From Recession 

The good news is that while no company is completely recession-proof, there are a few actions every business owner can take to make their company more resilient.

Debt and Cash

When the economy slows, banks (and investors) pull back. Banks impose more restrictions on new loans, call existing loans, and cancel or reduce credit lines. Unfortunately, this tends to happen at the same time your customers are spending less, demanding more, and paying later. 

The usual result is a cash crunch, and small businesses get the worst of it. You can mitigate this by paying off as much debt as you possibly can when times are good.

As you reduce your business and personal debt, it’s a good idea to also build up your cash reserves. This is challenging for most companies, since you need cash to pay off the debt. 

There really isn’t any magic number for how much cash you should have on hand, but we recommend building up a cash reserve of at least two or three months of expenses. Most small businesses operate with much tighter reserves, often less than a month’s expenses. Unless the owner has deep pockets or has wealthy relatives or friends, this is generally not a recipe for success.

Credit

Build up as much credit as possible while the economy is riding high. Then, when business slows down, if you are short of cash, you can still draw on your credit.

A challenge with this strategy is that banks watch credit usage very carefully. If a small business has a credit line but doesn’t use it, the bank will reduce it. 

The way around this is to use the credit line even if you don’t need it. For example, suppose your business expenses average $300,000 a month, and a bank offers you a $75,000 credit line. If you don’t need it now, you should still consider accepting the offer as long as the terms are reasonable. 

Then, instead of using cash to pay all your bills, use your credit line for some of them. Pay the balance back and then repeat the process. Your credit score will likely improve, making it easier to secure better terms the next time you apply for financing. 

The bank will view you as a trustworthy customer and will likely keep your line open, even as they shut down the lines of other less savvy customers. They may even offer to increase it. Then, when you really need the credit, you will have it.

Fixed Costs

When the economy is strong and cash flow is good, fixed costs are rarely an issue. But when the economy slows and cash flow slows down, high fixed costs can bring down even the mightiest business.

Every business is different, but no matter what industry you are in, you can find ways to reduce fixed costs and lower your risks. For example, you might be able to renegotiate your office lease or sublet out some of your office or warehouse space.

Many small businesses operate using a large number of software subscriptions (for accounting, marketing, inventory management, customer relationship management, document/contract management, etc.) Most of these subscriptions are fairly small, but they can add up over time. So every 6-12 months, go through the list and see which ones you can cut back or even eliminate.

Of course, one of the largest fixed costs for most businesses is labor. The standard corporate approach to downturns is to close plants and/or eliminate staff. If you own a small business, you have another option. Instead of laying people off, talk to your staff about reducing pay in the short term. If you treat your employees as human beings instead of fungible worker units, you may find they are willing to take a modest pay cut for a while to keep their jobs and help the company. Be sure to reward them when business picks up again!

Insurance

Make sure you have the right kinds of insurance and the right coverage levels. If a fire, a major snowstorm, or a flood occurs when things are good, you might be able to survive without insurance. But if business slows down AND you get hit by a natural or man-made disaster, your odds of surviving drop dramatically. 

Beyond the usual coverages, be sure to have “key man” insurance, business interruption insurance, and some form of internet security insurance (in the event of a malware attack, for example).

Diversify

Many successful small businesses get their start with a single major client, a single product, or a single market. This is fine when the economy is doing well. But in a recession, such over-concentration can be deadly. 

Look for ways to diversify across products, services, revenue streams, customer bases, market segments, or geographical areas. A restaurant group with five locations, different price points, and different cuisines is much more resilient than a restaurant with just one location. Similarly, a distributor that serves multiple industry sectors (for example, construction, plumbing, and electrical) across three or four states is more likely to survive a downturn than one that focuses on a single industrial sector in a single state.

The Time to Prepare Is Now

Don’t wait for the warning signs, they’re already here. Put these recession-proofing strategies into action today. You’ll sleep a lot better, and your employees will too.