Resources | Finance and Lending | March 16, 2023

How to Survive an Economic Downturn Without a Business Loan: 5 Debt-Free Strategies

Banks are the first place many suppliers seek funding, but loans aren’t always accessible during a recession. How else can you continue to operate and grow?

Banks are the first place many suppliers seek funding, but loans aren’t always accessible during a recession. How else can you continue to operate and grow?

The possibility of a recession in 2023 is still up for debate. If you use the traditional definition — which describes a recession as two consecutive quarters of declining gross domestic product (GDP) — then the United States has been in a recession since the summer of 2022. 

However, many economists are reluctant to use the term just yet. Employment rates and job opportunities are abundant, and some experts acknowledge a recession only when an economic decline is significant, widespread and extends beyond a few months. Most agree that a recession is imminent but that the steady labor market means this one will progress differently than those of the past. 

Regardless of how you define a recession, most small to mid-sized businesses are feeling the effects of an economic downturn. Inflation rates remain significantly higher than the 2% long-term target set by the Federal Reserve, which can impact businesses in several ways:

  • The cost of goods and services increases, lowering profit margins.

  • Demand for goods and services may decrease as consumers spend less.

  • Interest rates rise, making it more expensive for businesses to borrow. Banks may also establish more restrictive terms and lend more conservatively.

  • Supply chains may be disrupted as costs increase and demand falls.

  • Cash flow decreases and businesses may struggle to grow or even sustain operations.

The good news is that there are still ways you can build your business, even during uncertain economic times, without needing to acquire more debt or qualify for traditional funding sources. If rising inflation and interest rates are impacting your business’s cash flow, here are five strategies you can leverage today to stay resilient.

1. Evaluate your relationship with your bank or loan provider

During economic upheaval, the first instinct of buyers is to retain as much cash as possible, usually by extending payment terms with suppliers. For banks, it’s to reduce credit risk. This can leave your business in severe need of liquidity. While banks and loan providers might be the first place you go to address cash flow, these institutions often restrict lending and may make qualifying terms tougher for borrowers during inflationary periods. 

In recent years, many companies have turned to supply chain financing, also called reverse factoring, to increase liquidity for buyers and suppliers. These agreements involve a third-party lender — usually a bank or fintech — that finances early payment to suppliers in exchange for a discount. Economic downturns can cause banks to cancel these programs, potentially forcing suppliers back into long payment terms with their buyers.

If your business relies on banks or loan providers to manage cash flow, either through a loan or your buyer’s supply chain finance program, you might want to evaluate these options moving forward. If you plan to use a loan to navigate the economic downturn, do your due diligence and evaluate your eligibility before applying. Keep in mind that your buyers may also use working capital solutions, such as an early payment program, through a fintech company rather than a bank. These providers often have more flexible payment rates and options to help you through recessions.

2. Monitor your cash position closely

The more cash flow visibility you have, the better equipped you are to handle shortages and build a reserve (three to six months’ worth is recommended). The cash conversion cycle (CCC) is one of the most important metrics to monitor during inflation. In a nutshell, your CCC tells you how long it takes to turn your business’s inventory and other investments into cash flow generated from sales. The shorter your CCC, the more purchasing power you have as the cost of goods increases over time.

To shorten your CCC, you can do one or more of the following:

  1. Shorten the time it takes for inventory to sell (days inventory outstanding or DIO). 

  2. Shorten the time it takes to collect buyer payments (days sales outstanding or DSO).

  3. Increase the time it takes to pay bills without passing deadlines (days payable outstanding or DPO).

Ensure that you monitor these metrics closely and strategize how to optimize them. One of the easiest ways to decrease DSO is to invoice buyers quicker and review invoices closely for delay-causing mistakes. You can also use early payment programs such as C2FO’s to negotiate faster payments in exchange for a small discount. Paying your bills no earlier than the due date also helps improve CCC.

3. Reconsider how your product or service fits into the market

Demand for products and services tends to wane during inflationary periods as customers curb spending, which can eat into your profit margins. This is a good time to assess your product-market fit and make smart investments that differentiate your offering from those of your competitors. It’s important to remember that this is an opportunity to address real customer needs.

Recessions are associated with a reduction in business spending, but they are also great opportunities for innovation. Your customers are most likely adapting their preferences and behaviors to the new economic environment, making room for complementary products and services. Some considerations for new investments include:

  • Are there opportunities for a better value product or service than what customers can currently access?

  • Are there business investments, such as marketing, that will get you ahead in the long run — especially now that competitors may be cutting back? 

  • Are there ways to improve customer experiences, not just product offerings?

  • Can your business improve on any environmental, social and governance (ESG) initiatives as a differentiator?

Any capital you have available for new investments is likely limited, so do your research first. Make sure you understand market changes and how your customers’ priorities or values are evolving. Evaluate operational costs and reallocate funds to innovation research and development where possible.

4. Build stronger relationships with your buyers

During a recession, maintaining cash flow should be a top priority for any small to mid-sized business, and that means building stronger relationships. During an economic downturn, your buyers are probably also prioritizing their relationships with high-value suppliers.

Consistently delivering products to your customers on time and in full, as well as ensuring buyer satisfaction, is crucial for strengthening healthy, long-term relationships. Communicate regularly with your customers to clarify their needs and expectations. This practice often prompts idea sharing and leads to buyer-specific product development — the types of partnerships that enable innovation and growth even during downturns.

As ESG becomes a central part of enterprise business models, you can also strengthen customer relationships by taking advantage of ESG incentives available for suppliers. For example, incorporating sustainability practices into your business may attract ESG-focused buyers. Enterprises that use C2FO’s platform incentivize diverse and ESG-focused suppliers by offering early payments at competitive discount rates.

5. Find unique opportunities to access working capital

Working capital may be hard to secure from a bank or lender, but there are alternatives available to small to mid-sized suppliers. For example, a large network of enterprise buyers already implements C2FO’s Early Payment program, which offers suppliers early invoice payments in exchange for a small discount.

With C2FO, you can choose which invoices to request early payment on, determine the discount cost and get paid faster (32 days early, on average). This gives you more control over your cash flow so you can make growth investments and maintain a strong cash position when the economy slows down. For many small to mid-sized businesses, early payment programs offer a more cost-effective and accessible solution than financing from traditional lenders. 

The bottom line

Most suppliers are feeling the cumulative impacts of long customer payment terms, inflation and the rising cost of borrowing. Fortunately, there are several strategies you can use to thrive during the next dip in the economy, from decreasing your dependence on lenders to investigating new growth and innovation opportunities. The beauty of these strategies — unlike qualifying for traditional business loans — is that you can start taking advantage of them right now. 

Check to see if you have any customers already using C2FO’s Early Payment program so you can request early payment today.

This article originally published March 2021, and was updated March 2023.

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