A Recession 's Impact on a Small or Mid-Sized Company

12.31.20 2:15 PM

The advent of coronavirus—also called by its more scientific designation, COVID-19—has dramatically and perhaps even permanently altered the worldwide landscape for business, economics, and consumerism. It is predicted that a recession might hit the world because of the global lockdown and resulting quarantine that has become nearly ubiquitous. If a recession were to arise, how severely might it impact a small or mid-sized business?

A Recession 's Impact on a Small or Mid-Sized Company

How a Recession Changes the Business Landscape 

In order to understand how a recession will impact businesses as a whole, it is important to have a firm grasp of what exactly a recession is. In general, the term “recession” refers to any time when the gross domestic product (GDP) sees negative growth for two financial quarters in a row. Put differently, if there is a significant decline in economic activity across multiple sectors of the economy, and if this decline lasts for more than a few months, it is a recession. 

 

While all recessions are unique in what caused them and which areas are hit the hardest, some common denominators do exist across businesses as a whole. Because the economy is in a slump, spending power tends to be down; that means that consumer access to products decreases. Fewer people have access to products if their financial situations have taken a downturn and money is tight. Consumer money problems tend to put banks on edge, and the economy as a whole may begin to see credit impairment or more stringent—and less favorable—offerings from banks. While this can certainly impact consumer choice when it comes to being active in the economy, it will also affect businesses who may need temporary assistance to weather the downturn.

 

Dividends and stocks begin to slide, and in an effort to recover some profit and cut expenditures during the tougher times, many businesses wil lresort to compromises in the quality of their goods or services. This might mean reducing offerings, removing some features of a service package but keeping it the same price, or opting for lower-quality materials for a product.


As well as the impact on products and services, businesses are also likely to be feeling pinched in the employee sector as well. Recessions often lead to lay-offs and benefit reductions in order to curb costs. These are just some of the factors companies must contend with during a recession.

Why Big Businesses Come Out Ahead 

The larger a business is, the better it should weather a recession. The reasons for this are many, but the easiest way to understand the impacts is by simply putting oneself in the shoes of a large business. When sales are down, a big business is more likely to have a significant safety net. When employees must be laid off, a large company is likely to have a higher number of non-essential workers to choose from. If supplementary funding is needed, large businesses have the clout and financial history to secure better terms and rates on credit than smaller entities, as a general rule.


For these reasons—amongst many others—big businesses do not always face the same challenges that smaller businesses must address during a recession. Thankfully, small businesses do have options when it comes to tackling the issues that an economic downturn often presents. However, preparation is key.

Big businesses do not always face the same challenges that smaller businesses must address during a recession.

How to Weather a Recession as a Smaller Company 

Smaller companies are almost always hit harder by a recession than their larger counterparts, and in order to overcome these challenges, small and mid-sized businesses must make preparations for an economic downturn well in advance. One of the primary areas that will be hit hardest is cash flow; while large companies might have a safety net and can weather a temporary loss of income, smaller businesses are often more tightly controlled. If the payment cycle becomes disrupted (such as via a client not paying), the entire process becomes jeopardized.

 

Thus, the chain reaction begins: a customer or client delays paying a bill (likely because they are waiting for cash to come in themselves), which forces the small business to delay payment to a supplier, and soon, the entire chain has been interrupted, slowing production. A small business might think, “It’s not ideal, but a loan from the bank would really help right now,” only to meet with reduced access to funds and highly unfavorable terms as a result of the recession. In this way, borrowing essentially becomes a non-option.

 

In order to overcome this, small businesses must work early on to establish cordial and beneficial relationships with sources of credit, as well as setting aside emergency spending money. In fact, opening an option for borrowing (such as a line of credit) prior to a downturn and keeping it paid off will go a long way in providing some cushion during challenging times.

 

Optimizing marketing is another area where small businesses in particular must key in on prior to a downturn. One of the easiest areas to cut when money is tight is marketing; knowing this, smaller companies would do well to optimize the spend on their marketing efforts early on so that they do not represent a significant monetary burden during leaner times. In addition, marketing early ensures greater name recognition later, reducing the need for aggressive and costly marketing just to keep the business afloat in a recession. 

 

These are just a few of the many challenges—and solutions—small and mid-sized businesses will have to contend with in an economic downturn, but planning ahead can mean the difference between success and closing up shop. Downturns are never predictable, in either their timing or their duration, so businesses of all sizes would do well to come up with a plan of action for dealing with these hardships ahead of time. Remember to always stay smart—do not hire more employees than are needed, optimize marketing spend, and avoid overly large product stockpiling in the event that the items cannot later be liquidated.