Experts agree that a global recession is likely on the horizon, presenting a 180-degree-turn from what was supposed to be a promising year of growth. In fact, the International Monetary Fund forecasted in January that 2020 would see a growth rate of 3.3%. But the fallout from the coronavirus crisis has us staring at a scenario that could be even worse than what we saw during the Great Recession.
“With the economic shock of the health crisis spreading around the world, economists are scrambling to revise their projections,” explains a financial report from Foreign Affairs. “The Organization for Economic Cooperation and Development recently slashed its forecast for 2020 growth by half, from 2.9% to 1.5%, and the IMF has signaled that it will issue a significant revision soon. But even this first round of revisions may have been too optimistic since they incorporated the widely held (but incorrect) assumption that the recovery would follow a sharp V-like pattern—a first-quarter hit that is immediately offset in the second quarter.”
Given the economic conditions, you might be wondering if this is a prime time for your small business to borrow money. The answer to this question depends on multiple factors. First off, interest rates will most likely be lower than in years past. These low rates make debt financing more affordable, allowing you to do more with less. The best-case scenario would be to time your loan application to take advantage of the lowest possible rates, but that is impossible to do in the best of times, let alone during an international crisis.
On the other hand, recessions bring other factors worth considering. Consumer spending often plummets, which puts a strain on your business and hampers your cash flow. Many experts anticipate the coronavirus crisis to hurt both supply and demand. As borders close and the airline industry is slashed, the regular dynamics of our economy come to a screeching halt.
“While the benefits of borrowing money at low interest rates are easy to understand, there are drawbacks,” says the Houston Chronicle. “If your business is slow during a recession, your revenues might not cover the interest payments on your new debt. After interest rates rise again, you can stockpile the borrowed money in interest-bearing securities at the same or higher rates until you need the money, but an extended period of low rates, such as that following the credit crisis of 2008, can force you to dip into your borrowed funds to pay your interest payments.”
These uncertain times require you to make the most informed decisions possible. Reevaluate your business plan and current debt load. Are you positioned to survive a recession? What if the recession were particularly long and severe?
As part of this process, you’ll want to prepare multiple business plans that forecast how your business could handle the various scenarios presented by a recession. This research will guide your decision about whether or not to seek additional debt financing. If you move forward with a loan application, you can take heart, knowing that your research backs the decision. If you decide to wait until a better time, it’s probable that your due diligence prevented your business from getting into a challenging debt situation.