Is a bad winter about to set upon the business community of America? This winter does not refer to severe weather or bad road conditions, but more so, the “winter of finance”, also known as a recession. Some financial experts say that a recession is something to keep an eye on as 2020 approaches. Hedge fund manager Ray Dalio stated that he believes the U.S. is heading for the late stages of the debt cycle. If you’re an entrepreneur and you’re concerned about how to navigate the winter of finance, here’s what you should know.
How The Debt Cycle Affects Your Business Activities
The debt cycle’s six stages are known as the good borrowing part, the bubble, the plateau, the depression, the de-leveraging phase, and then normalization. Typically, the good part is right before economic growth when money is plenteous and interest rates are low, and your business can borrow money. The bubble is what happens when things go well and product demand goes up, prices go up, and you borrow more money. But the next phase is when debt and inflation get too high, interest rates have to be raised, and borrowing regulations made stricter. The result is a recession or depression where economic activity goes in reverse as the supply of money dwindles, though sometimes the government institutes quantitative easing to print more money but putting a strain on resources. In the de-leverage stage, your business takes drastic measures to cut expenses, pay off the debt and stay running. And then the recovery happens, and everything starts all over again. Perhaps you benefited from the economic surge in 2017 were able to start a business or add more financing to your own, but if this cycle brings the winter to you, what should you do?
Figure Out How To Stash Away Savings For Your Business
When economic activity slows down for the winter and things get a little tight, your business may need to have an emergency fund on hand to get it through the tight times. What you need to do is have a realistic plan for setting aside money in a savings fund that won’t take too much out of your cash flow. Ways to do this are to set aside certain cash influxes such as money from a tax refund, extra income made during holiday periods, and possibly selling an asset that you no longer need. Building up cash reserves can be harder from a business standpoint, but it is possible with a little creativity and sometimes the advice of a CPA who may know more about building emergency funds.
Make Careful Hiring And Layoff Decisions
Typically the time to hire employees is after you’ve been approved for a loan and are seeing a rise in sales. But if winter is imminent, you may be faced with decisions on downsizing your workforce and potential layoffs. You may be wondering if you can avoid situations like these if you’ve built up a savings fund. In some cases, yes, you may need to look at simply cutting non-essential employees including seasonal hires or cut services you may pay independent contractors for. If layoffs for regular employees are unavoidable, they may only need to be temporary and you can reinstate them once things pick back up again. Just make sure you communicate in an honest but sympathetic way to let them know you will try and keep them on, but that you’re in the midst of hard times and need to make tough decisions.
Look Into Emergency Borrowing Situations
At a time when the debt cycle is reaching the downward trajectory and things aren’t looking good, borrowing money may not be easy. You should be prepared to use savings in the case of any emergency situations that come up during these times, but it can sometimes be hard to plan for the unexpected. There are borrowing options that could be done using your business or personal assets as collateral, or you may want to seek to borrow from friends or family. You can also look into the installment loans Illinois offers, or if you live in another state, see what loan options are available for unexpected emergency situations.
Be Prepared To Exit Your Business
If you’ve explored your other options and have no other recourse but to close up shop because of the winter, know what you need to do to exit. You may want to try and sell your business through a business broker if you feel someone would buy, or you may need to dissolve it and find another way to sell your assets and pay off debt. This is a tough decision to make, but it could be an opportunity to move onto a new and better business opportunity, or possibly invest in something that’s stable such as bonds, real estate or precious metals. Just remember the end of one opportunity can mean the beginning of another.
In conclusion, winter will always come as part of the economic cycle, but knowing what you’re up against can help you be aware of what’s coming and know if you need to make major changes. The businesses that survive economic downturns are ones that can adapt when times change, and consumer confidence isn’t nearly as high.
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