Millions of businesses around the world are suffering from the economic damage caused by the coronavirus. The small business financial crisis is forcing entrepreneurs and owners to reexamine everything about their organizations, including deferring payments, getting emergency loans, or laying off staff.
During a period of economic collapse, it’s vitally important to prepare your business and reduce costs. We know you have questions as the recession looms, so here’s some practical guidance and answers on what you can do to survive.
How Do I Protect My Small Business From a Recession?
We believe there are five main ways that you can help your small business to survive. Four of them are applicable to any recession or financial crisis, while one (COVID-19 loans) is specific to the coronavirus and US legislation:
- Get a complete understanding of your income and expenses.
- Reduce your business costs wherever you can.
- Apply for emergency coronavirus / COVID-19 loans.
- Look at alternative business models for creating revenue streams.
- Build up a cash buffer in your business to weather difficult times.
A combination of these approaches will help you maintain control of your business, and concentrating on the actions you can take may help to reduce anxiety. We’ll cover each of these in the questions below.
How Can I Understand Where My Small Business is Spending Money?
You can only start cutting costs once you know exactly where your money is going. That means digging into your accounting and bookkeeping to get a deep understanding of all your expenses. You can start by categorizing what you’re spending into different areas. Go through your bookkeeping software and assign every business transaction to an income or expense area. Make sure you check your business bank account to capture absolutely everything.
The more detail you can use to categorize, the easier it will be to see exactly where your costs are. That’s a necessary first step before you start looking at limiting the money going out of your business.
What’s the Best Way for My Small Business to Cut Expenses?
Once you’ve categorized everything and understand where your costs are, you’ll need to tackle each, one by one. Ask the question “What’s the best way for me to reduce or delay this cost?” Here are some suggestions:
- If you pay rent, talk to your landlord about delaying rental payments.
- If you have a mortgage that you use to pay for your business, speak to your bank about pausing repayments. The same goes for other secured and unsecured loans.
- Talk to suppliers about deferring payments for inventory or returning stock.
- If you lease equipment, vehicles, computers, or other assets, speak to the provider about returning assets or reducing payments.
- For utility bills, speak to a provider about delaying payments. Most utility companies have stated they will not disconnect for nonpayment.
- Look at your business marketing costs and see if you can redirect them to promote new revenue streams.
- For any other costs, explore whether you can eliminate, delay, or reduce them.
You need to make your small business as lean as reasonably possible, without damaging things to the point that it makes recovery impossible.
You’ll notice one major business expense we haven’t covered above: Your staff and payroll. That’s because you have a few options there.
Should I Layoff or Furlough Staff During the Coronavirus Recession?
That depends. Federal and state governments would definitely prefer that you do not lay off staff permanently. There are some forgivable loan programs available to help you keep staff on or rehire them after the worst of the crisis is over. It’s important to note that the administration of these loans and the systems used to process unemployment are under severe strain. At the moment, the various forgivable loan programs will only cover payroll costs for between two and three months.
If you do furlough or lay off employees, they can apply for unemployment benefits, which are also being subsidized by the government. It’s worth exploring the loans available to your small business and seeing how much they can help before permanently laying off workers. Ultimately, though, you may need to make that difficult choice.
What Emergency Coronavirus Loans Are Available to My Small Business?
We have a complete guide to coronavirus loans and eligibility, but here are the basics. There are two main loans you can apply for:
The Paycheck Protection Program (PPP): Your small business can get a loan through a bank for your payroll. When you pay workers during the crisis or rehire them afterward, the amount you borrow is “forgivable” which means you do not need to pay it back. The Small Business Administration (SBA) lets you search for PPP loan providers.
The Economic Injury Disaster Loan Program (EIDL): This loan comes directly from the SBA, and you can apply through the website. You can get a combination of a forgivable advance, and low interest on the remainder of the loan.
How Can I Diversify My Small Business to Create More Revenue?
Of course, it’s not just about keeping costs down in your small business, you also need to look at ways you can bring in more money, even if only temporarily. The methods you can use depend on the type of business you run.
- Can you move to selling online, or via pickup or delivery? If so, you will need to update your website and develop a system for taking orders online and over the phone.
- Can you move your business outdoors, where concerns about catching coronavirus will be lessened?
- If you’re an essential business, can you provide proper protective equipment to employees? How will you enforce social distancing at your locations?
- Is it worthwhile to promote discounts even if it hurts profits in the short term but keeps revenue coming in?
- Are you able to partially or fully move your business to remote working, and get the tools in place to help employees stay productive?
- Are you able to move to a subscription model, where customers pay every month for products or services, so you can stabilize income?
This is the time for deeply creative thinking and diversifying your revenue.
How Can I Help Secure My Small Business for the Future?
Cash is the lifeblood of a small business, and one of the main reasons businesses are failing is that they simply don’t have enough cash reserves to wait this out. A report by JP Morgan found that median small businesses only have enough cash on hand to support themselves for 27 days without income. This figure was even lower for businesses with a tight profit margin, like restaurants.
This is likely one of the biggest contributing factors to high unemployment—small businesses simply don’t have enough cash on hand to retain staff. One of the best ways to build business resilience is to make sure you keep enough money in the business to last as long as possible. That might mean paying yourself slightly less or putting plans for expansion temporarily on hold. The coronavirus and this recession came upon us very suddenly, leaving businesses and individuals with very little time to prepare. Once we get through this, we need to look to potential crises in future, and build up cash buffers to survive.
We hope these answers have helped to clarify how you’re thinking about the current situation. These are very challenging times, so good practice in your small business now can help prepare you for the future.
Connect2Capital is Here to Help
From day one, we’ve been on a mission to connect small business owners with non-traditional funding sources when traditional funding is not an option. Our team is here to help you navigate through the complexities of COVID-19’s impact on your business.
Need more tailored guidance? Connect with our team today