The news is full of doom and gloom about the bank crisis and a potential recession, causing many consumers and business owners to fear the future. A bank crisis does, in fact, have impacts on the economy and can particularly affect entrepreneurs and small business owners. However, knowledge is power, so the key is for entrepreneurs to know the potential impact on their business – but also what to do about it.
Here we’ll discuss how the bank crisis may affect the future of entrepreneurs and what you can do to protect your business.
What Is a Bank Crisis?
Banks, by nature, face numerous risks. These risks include credit risk, meaning loans may not be paid turning them into non-performing assets, and liquidity risk, which is when withdrawals from the bank are more than the bank’s available funds. They also face interest rate risk, meaning, in simple terms, that when interest rates rise, the value of the bonds they hold decreases, which causes them to pay more interest on deposits than they earn on loans.
These risks can lead to insolvency, which is when the liabilities of the bank are greater than its assets. A bank crisis occurs when multiple banks in a country are facing insolvency at the same time. This can have a snowball effect and cause insolvency in other banks for a variety of reasons.
Funding is always a challenge for entrepreneurs, along with all the other challenges that entrepreneurs face. A banking crisis increases this challenge because during a banking crisis, banks are more risk averse, meaning they tighten their lending standards. This means that it becomes more difficult for entrepreneurs to obtain bank loans or lines of credit.
Additionally, if business owners are able to access funding, the rates and terms are likely to be less favorable, which can affect cash flow and the bottom line.
Currently, investors are also less willing to take on risk, so entrepreneurs seeking angel investments, venture capital, or private equity funding are going to face a more difficult road.
The result of these funding challenges is that many entrepreneurs have to resort to using their own funds to start or operate their businesses while the bank crisis runs its course.
Decreased Consumer Confidence
The bank crisis also has a huge impact on consumer confidence, and when consumer confidence is low, they tend to pull back on their spending, thus affecting the revenue of businesses. This impacts businesses of all sizes but is a huge challenge for small business owners who generally can’t afford to face significant declines in revenue.
Additionally, consumers face the same funding challenges that business face, with tighter lending guidelines and higher interest rates. This means that businesses whose customers rely on financing face additional challenges in terms of revenue.
The banking crisis has also, by some predictions, increased the likelihood of a recession, which is a common result of a bank crisis. A recession has a general definition which is a “slippage in economic activity,” but a common definition is two consecutive quarters of negative gross domestic product (GDP) growth.
A recession can impact businesses in a few different ways. First of all, in a recession, lenders often tighten their lending standards even further, particularly when it comes to small businesses, which are the most vulnerable during a recession.
Second, during a recession, people are spending far less money, which means that most businesses will face a decline in sales. Some industries are more vulnerable to this, including the energy and manufacturing sectors, as well as retail.
Additionally, small businesses often can’t pay their existing debt, leading to decreased business credit scores or even bankruptcy. Again, small businesses are the most vulnerable, so during a recession the number of small business bankruptcies often increases significantly.
Finally, the financial woes of businesses caused by the recession often lead to layoffs to reduce costs. This can impact the productivity of the company, as well as the customer experience the company provides.
How to Protect Your Business
The good news is that “this too shall pass”. The bank crisis and the potential recession are temporary, so the key is to weather the storm. The economy is cyclical, and while the recent economy has been impacted by events that were unpredictable, it will cycle back up at some point in the near future.
More good news is that there are several things you can do things to try to keep your business alive until the economy improves.
The first thing you should do is an analysis of all your costs to find expenses that you can reduce or even eliminate. One of the biggest costs that you can reduce is, unfortunately, your labor costs. At lower sales levels, it’s likely that you don’t need all the labor you’re currently paying for, so try to reduce your labor costs to just enough to manage the business at your current sales levels.
You can also analyze your company processes to see if they can be automated or made more efficient. Doing so may enable you to reduce your labor costs even more.
Reducing your labor may also enable you to reduce your overhead by downsizing your space. If that’s not an option, you can try to negotiate a lower rent and try to keep your utility costs done.
Another way to reduce costs is to try to negotiate lower prices from your suppliers to reduce your cost of goods sold. You could also shop around for vendors that offer lower prices.
Finally, analyze all your smaller costs for anything from credit card processing fees to office supplies. Go line by line and look at every cost – saving small amounts here and there can add up.
Cash Is King
While normally you may focus on your bottom line, you should be focusing on cash flow, particularly during rough economic times. Cash not in hand is cash that can’t be used to meet your business obligations and keep your business afloat.
There are three key ways to improve your cash flow:
- Accounts receivable – Accounts receivable are an asset for your business, but they are not cash. You’ll need to manage your accounts receivable so that the money you’re owed comes in as quickly as possible. You can increase your collection efforts and shorten your payment terms to get money in your pocket faster.
- Accounts payable – On the flip side, you’ll want to delay paying your accounts payable for as long as possible so that your cash will work for you longer. Pay your payables as late as you can without incurring a penalty and try to negotiate with your vendors to lengthen your payment terms.
- Inventory – You can have the largest impact on your cash flow by keeping your inventory at optimal levels. Inventory that you hold, like accounts receivable, is an asset, but not cash. You need to find your optimal inventory level that enables you to fulfill orders on time, but not have so much inventory that your cash level is too low.
If you currently “push” your inventory, meaning you keep inventory and then sell it, you may want to consider a “pull” strategy if it’s feasible for your business. In a pull strategy, you purchase inventory as you receive orders so that you are not holding inventory. That can significantly increase your cash on hand.
Increase Customer Retention
Since new customers are probably going to be slow to acquire during a recession, you need to focus on keeping the ones that you have. Engage with them often by emailing or texting special offers, or by emailing a newsletter regularly. Regular communication can go a long way.
You might also consider implementing a rewards program if you don’t already have one. Giving special rewards after spending a certain amount or making a certain number of purchases can help keep those customers coming back. You can also send members exclusive offers to make them feel as though they’re getting something special.
The point is that if these customers feel as though they’re getting a good deal, they’ll be more likely to spend money in spite of the economy.
Finally, in non-financial terms, make sure that your customers are getting the best experience possible from your business. Make sure that your customer service is on point and go out of your way to make them leave your business feeling great.
Offer Special Prices
Sales with reduced profit margins are better than no sales at all, so offer special promotions so that everyone feels like they’re getting a deal. You can do this with your products or services that are already the most profitable, so that you won’t feel the pinch quite as much.
You can also bundle products at special prices to increase your total sale amount per customer.
Another tactic is to offer a reward for new customers, such as a discount on their first purchase, or some kind of freebie like a t-shirt or mug.
Promote these special deals heavily and use an empathetic approach to your marketing. Customers want to feel as though you’re trying to do something good for them to ease their current financial issues.
When your efforts bring in new customers, just like with current customers, make sure that you’re providing the best customer experience possible. Give them personal service, and make sure your employees know to do the same.
Don’t Give Up on Financing
While a financial crisis can make getting financing more difficult, don’t give up on trying to get a loan or a line of credit that can help you keep your business afloat. You’ll likely have to personally guarantee the loan, so be sure that you’re willing to do so.
A line of credit is the best option because you can use it only when you need it, such as when cash is too low to pay your obligations or to market your special promotions.
Just use it as sparingly as you can, pay it on time, and pay it back in full as soon as your finances allow.
If there are companies in your area that sell products that are complementary to yours, you might be able to form partnerships with them to share resources for marketing. For example, if you have a remodeling company, you could join forces with a plumbing company to market your services jointly. This will save you and the partner marketing dollars, and still allow you to get the word out about your company.
You could even offer discounts on both of your services so that customers really feel like they’re getting a deal. That’s a win for everyone.
Don’t Stop Marketing
While you may have to cut your marketing budget, you still need to be able to reach your target customers. Focus your marketing efforts on what you know has worked best in the past, and step up your low cost or free marketing, like social media posts. Consider trying something you’ve never done before too, like making a video about your products or holding a webinar to share your expertise.
You can also put a blog on your website if you don’t already have one. If your business caters to local customers, you can use location-based keywords in your blog content that can make it easier for customers to find you online.
You can also implement a referral program, where current customers get a reward when they refer new customers to you. Send an email to your customer list asking for referrals and offering some kind of discount or gift card when their referral makes a purchase.
The bank crisis and the potential recession affect entrepreneurs in several ways, but it doesn’t have to break you. You just need to put in some extra effort and get creative to help your business ride out the storm. Remember, this too shall pass, and when it does your business could come out stronger than it was before. Don’t give up, roll up your sleeves, and fight to keep what you’ve built.