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United Kingdom
Updated: 5 September 2023
Economies are known to experience cycles as markets evolve, people’s wants and needs change and world events take place. As such, good and bad periods of market conditions are an inevitable part of running a business, and knowing how to prepare can put you in the best position to remain strong throughout the cycle.
At the time of writing, the UK has avoided recession so far in 2023, although some forecasts are predicting we may be facing one next year. Whether it comes or not, here we’ll take a look at what a recession is and how you can be prepared for one.
A recession is a period of time where economic activity is in decline. Different bodies may look at factors like unemployment levels, productivity, sales, output, but the most common measure is GDP. The typical rule of thumb is that if GDP falls for two quarters in a row, we are then deemed to be in a recession, and it lasts until GDP begins to grow again.
In a recession, economic growth slows down, which can lead to a dip in employment rates and disposable income. As a result, consumer spending decreases, affecting businesses’ revenues and profits. Often, companies are forced to make difficult decisions like layoffs, budget cuts and restructuring to weather the downturn.
A recession is an outcome of things that are already happening in the economy, which then have knock on effects. For example, consumer spending may drop, which leads to lower business revenue. That in turn could mean more redundancies, which affects spending even further.
Government’s try to avoid recessions wherever possible, and enact policies to reduce their impact and stimulate economic growth when they do hit.
According to the National Bureau of Economic Research (NBER), in the UK there have been seven recessions since the 1960s and the average length has been around 10 months. The 2008 financial crisis led to an 18-month recession, the longest in the post-war era.
While the recession period itself may not always last long, its effects will continue to be felt after GDP begins to grow, and it can take much longer for the economy to recover to its previous peak.
At the time of writing in September 2023, we are not currently in a recession in the UK.
As market conditions continue to evolve, every recession is different. For example after 2008, interest rates were dropped to historic lows to encourage borrowing. During the pandemic, aside from having to close premises, one of the main issues affecting businesses was moving goods in a global supply chain, causing significant delays and disruption. Now, interest rates have been increased in an effort to reduce inflation, so any upcoming recession would differ again.
Typically, in a recession businesses become more prudent in their financial management. If revenue is down and budgets get squeezed, you may need to use contingency plans for how to operate in such an environment, or pivot to new products or services.
As well as challenges, recessions can provide opportunities. While others are holding off on growth plans or new projects, you can take advantage and look to grow in a less competitive field.
During a recession, lenders often become more conservative, tightening their credit criteria. However, dedicated business finance providers will continue to lend to businesses through the cycle.
Funding Circle was founded in the wake of the 2008 financial crisis specifically to help small businesses get better access to finance, and we’ve been lending to thousands of businesses across the UK ever since.
Diversify revenue streams: A recession could prove an opportunity to explore new markets or product lines. More fingers in more pies means less overall risk, as if one area of the business is failing, another could be picking up the slack.
Improve efficiency: Streamlining operations can help to reduce costs significantly. Consider investing in software and other digital platforms to help automate operations.
Focus on core customers: During the pandemic we saw an increasing trend of consumers looking to support their favourite small businesses. Keep them engaged with newsletters, social media and more so they keep coming back.
Keep marketing: Cutting marketing also means less sales through the door, which is not what you want during a recession. Instead look at how you can optimise your marketing campaigns to attract new customers more efficiently, so you get more bang for your buck.
Maintain a strong cash reserve: Keeping a cash reserve can provide a necessary cushion to weather the economic downturn. This can either be from operating income, a working capital loan, or having a line of credit on hand in case of emergencies.
At Funding Circle, we offer fast, flexible finance that can help you adapt to changing economic conditions:
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