How Does a Recession Affect Small Businesses in Canada?

After having come out of the dark cloud of the pandemic and its unprecedented impact on all industries, followed by the challenges of the supply chain crisis, the very real buzzword now at play is recession. 

In its simplest terms, a recession is a temporary period of noticeable economic decline across the market, marked by a decline of the country’s GDP (Gross Domestic Product) in at least two successive quarters.

For all the talk surrounding the recession in Canada, in this blog we’re specifically taking a look at the effects of a recession on small and medium sized businesses, what this means for finances, and some potential solutions that businesses can consider to help alleviate the additional financial burden that it brings.

Small Business and Recession - Potential Direct Impacts

The stark reality is, recessions are not good for any business. An increase in the price of goods followed by a decrease in consumer spending, which leads to increased unemployment means that there is simply less money being spent and therefore a weaker economy. Regardless of the type or size of business, there is a widespread impact during a recession on businesses both in terms of their sales as well as their own purchasing power.

As the general cost of goods and the cost of living are increasing, consumers are redirecting available funds towards essential spending whether that be housing, food, or fuel. This same rise in cost of goods affects business buyers who are seeing their own margins and profits shrink. Accordingly, businesses that rely on discretionary spending, (in other words, non essential services or goods), will be hit the hardest. When finances are tight, it becomes that much harder for individuals or businesses to indulge in non- essential spending.

Small businesses usually fall into this category as they are often in the retail/e-commerce space of any non-essential goods, the restaurant industry, or nonessential services. 

A secondary impact is that businesses may need to reduce the number of people they employ due to a lack of incoming business, contributing to a rise in the rate of unemployment and, again, less disposable income to be spent in general.

While consumers have a certain amount of funds that they’ve saved over the past few years, it is likely that much of that will be redirected towards essential spending as mentioned. With any remaining funds, a general shift in sentiment can be seen.

Although customers have always looked for a good deal, this is moreso the case than is usual. There is increasing value in businesses selling at a larger scale but at a reduced price, or with an emphasis on value and savings. With businesses feeling like they have to raise prices, there is the possibility of a fall in consumer satisfaction, motivation to purchase, ultimately meaning that merchants may find themselves priced out. 

Small Business and Recession - Potential Indirect Impact

Both inventory and accounts receivables were greatly affected by supply chain delays, and the unfortunate reality is that a recession can create the same effect.

As turnover time increases due to delays in the supply chain, businesses will find themselves with higher amounts of receivables and payables, both of which have a direct negative impact on available cash flow.

How Alternative Lenders Like Merchant Growth Help Small Businesses

In this climate, traditional lending institutions tighten lending policy, it becomes more challenging to obtain conventional funding. In contrast, alternative lenders have additional flexibility when it comes to lending decisioning, and see the recession as increased demand for their products. Notwithstanding this, they too are not exempt from the impact of a recession and must adjust their credit policies as well to the expectations of higher default rates. 

Unlike banks which have more rigid criteria given their lower risk appetite, alternative lenders look at such businesses with a different lens given their higher risk appetite.

Because alternative lenders operate in the private sector there is added liberty and discretion to help borrowers as best as possible. Approvals and financing amounts offered by alternative lenders are still impacted by outside forces like the general state of the economy. Furthermore not all lenders operate with the same criteria or strategy which means an economic downturn can lead some larger lenders to close their credit significantly, only lending to a much smaller number of merchants than they normally would. 

Supplier Behavior and Credit

For wholesalers and distributors, the recessionary effect on small business buyers means that B2B transactions will also feel an immediate impact. Moreover for buyers they are facing a tightening of credit which impacts things such as down payments, and the overall cost of debt. In other words, small business buyers will experience strain when it comes to managing cash flow at all aspects of their business. But the strain doesn’t end with small business buyers, as suppliers also feel the strain in a reduction in sales.

How B2B BNPL Solutions Like Tabit Help Both Business Buyers and Sellers

B2B BNPL helps both business buyers and sellers by providing additional liquidity options. By offering credit solutions when it’s most needed, buyers can make their purchases without worrying about paying off the full value at the time of purchase, while sellers can collect on these sales right away. Solutions like Tabit help wholesalers stay close to the buyer, offering a credit solution they might not have offered previously. This additional flexibility in payment options offers that much more value to buyers during difficult financial times and give suppliers a competitive advantage. 

What Can Businesses do to Minimize the Impact

As a wholesaler, the key is to emphasize the value of this credit offering to your buyers. . Building strong and long-term relationships with partners and customers is more important than ever.

For small businesses, the priority should be maintaining your net available cash flow, after external financing. With that, you can cover expenses, purchase inventory, and pay your staff. Look for savings and added advantages in every transaction you make - whether it’s direct cost,  or payment flexibility. Remember, it is a two-way relationship, your supplier also wins if you remain a viable business and continue to purchase from them for years to come. Small businesses have shown themselves time and time again to be incredibly resilient regardless of the circumstances.

The reality is, running a small business is never an easy feat, but running a small business during a recession comes with additional challenges. Luckily there are credit and payment options available to help minimize recessionary impacts and keep things moving.