How Recessions Can Impact Borrowing and Lending

Recession—or even the concern surrounding a possible recession—can deeply affect business owners in two ways: it can diminish sales and revenue and, if the business lacks scale, market power, or financial leverage, it can limit the resources available to help a business owner weather a tight economic.

For this reason, recessions push many small business owners to money lenders prior to, during, and after a recession. In fact, the Federal Financial Institutions Examination Council found small business loans peaked at 14 million in 2007, just before the Great Recession.

What Can You Expect as a Borrower During a Recession?

A recession is a normal economic state that tends to follow periods of growth or large-scale events. 

If the economy enters a recession in 2023—and the likelihood of this has been pegged at 96% … or 25%, so take your pick—it will be following a period where both growth and large-scale events played a factor. How do we know this? Because economies follow a natural order of actions (recessions) spurring reactions (growth).

For example, a recession that lasts 11 months could lead to 67 months of growth. Or it could lead to even more. Remember, our last recession in the US ended in 2009. According to the Center on Budget and Policy Priorities (CBPP), the economy grew an average of 2.3% between mid-2009 and 2019. That’s a long time.

Still, there are some hurdles to get past as a borrower during a period of economic decline:

• Tighter Credit Requirements: Lenders often increase their loan requirements during a recession to avoid financial risks, which makes qualifying for loans harder on businesses without great credit scores, cash reserves, or collateral.
  
• A Lowering of Your Credit Score: Borrowers often see a shift in their credit score during a recession—usually downward as cash flow issues make it harder to pay off their debts.
  
• Less Available Capital: Banks and other lenders may process fewer loans during a recession because of the risk and unfavorable interest terms.

How to Use Business Financing During a Recession

If you need to borrow money during a recession—whether to grow, acquire a neighboring business, or just to pay your team and keep the lights on, then how you use the financing you get is clear. 

But if you’re borrowing as a hedge against the possibility of getting to a mission-critical place, you have options:

1. Invest the money and earn enough to cover the payments and then some. 
2. Pour the money back into your business.

John Quelch, University of Miami’s Dean of Business School, argues for putting the cash back into your business, noting that “investing in your business during a recession while competitors are cutting back can yield a greater ROI at a lower cost than investing in your business during good times.”

This could mean upgrading your equipment to work more efficiently or expand your offering, expanding your footprint to serve more customers, acquiring a competitor to grow your customer base, or growing your team to improve customer service.

In other words, if you have a plan you believe in for the funds and you’re confident in your ability to execute, don’t let “recession” get in your way. If you’d prefer to hear this from someone else, heed the words of Jon Huntsman Jr., the former Governor of Utah and US Ambassador to China: “Economic recovery must be earned, and it will be earned by entrepreneurs and small businesses.”

That’s you.

_{The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.}