Oli Paterson

What Happens to Small Businesses in a Recession

Small business recession


For small business owners, a recession can be the beginning of a long slog. From shifting consumer behaviours to tightening credit markets and regulatory overhauls, the impact of a recession is multi-faceted and often tricky to navigate. Drawing on academic research papers by Sahin et al. (2010), Berkowitz and White (2004), Dennis (2011), and findings from the Federal Reserve’s Small Business Meeting Series, this article aims to dissect the key challenges that small businesses face during economic downturns.

The Shift in Consumer Demand

What The Research Says

Sahin et al. (2010) stated that human behaviour changed dramatically during recessions. The spending habits shift from luxury or non-essential items to necessities, causing specific sectors to suffer more than others.

It is also important to remember why a recession is happening. In Canada, real estate is at the heart of economic woes, and people will kill spending on everything to save their homes.

The Implications for Small Business

If your small business sells luxury items or services considered non-essential, the drop in demand can be catastrophic. Cash flow is the lifeblood of any small business, and a sudden fall in revenue can choke that vital stream.

Actionable Insight

A proactive move can be diversifying your product or service range to include items or services deemed essential or ‘recession-proof.’ This can not only offset losses but can also introduce your business to a new set of consumers. Timing and targeted marketing are critical (DO NOT KILL MARKETING BUDGET). Bundle essentials at a discount to generate interest and offer value, a highly appealing move in a recession-stricken economy. Irritating words like ‘pivot’ will be thrown around, but we must all make necessary changes to keep things afloat.

Credit Access: The Evaporating Lifeline

What The Research Says

As Berkowitz and White (2004) pointed out, credit lines, essential for small business survival, often become restricted during recessions. Even if available, these come with substantially higher interest rates, squeezing already limited profits.

Implications for Small Business

This is not just a challenge; it’s an existential threat. Your ability to invest in inventory, manage payrolls, and essentially keep the doors open can be severely limited due to inaccessible or costly credit.

Actionable Insight

Before the recession hits, cultivate multiple credit lines and alternatives. Consider micro-loans, crowd-funding, or even strategic partnerships as alternative financial resources. An emergency fund could also serve as a temporary buffer.

Rethinking Future Investments

What The Research Says

Sahin et al. (2010) mention a significant decline in fixed investments, such as machinery, property, and technology, during economic downturns.

Implications for Small Business

Postponing these investments means losing out on potential efficiency gains or expansion opportunities. In extreme cases, it can lead to obsolescence.

Actionable Insight

Analyze your planned investments to identify the ones critical for the business’s short-term survival and long-term growth. Prioritize investments that yield immediate returns in efficiency or cost-savings. In some cases, a reduced version of a planned investment could offer significant benefits without the full financial burden.

Workforce Management and Morale

What The Research Says

According to Dennis (2011), workforce management becomes increasingly difficult during a recession. Layoffs not only impact those who are let go but also affect the morale and productivity of remaining employees.

Implications for Small Business

Reducing your workforce may seem like a quick fix, but the ripple effects can be damaging.

Actionable Insight

Before resorting to layoffs, consider less drastic measures such as reduced hours, furloughs, or even unpaid leave. The key is to maintain open channels of communication with your employees, ensuring that everyone is on the same page.

Regulatory Challenges: The Moving Goalposts

What The Research Says

The Federal Reserve’s Small Business Meeting Series highlights that regulatory changes can compound the challenges of a recession.

Implications for Small Business

Your business might not only have to adapt to market conditions but also navigate through new laws and regulations, which often involve costs and time-consuming adjustments.

Actionable Insight

Invest in staying updated on regulatory changes. Consult with legal experts who specialize in business laws and regulations. Advanced planning and compliance can mitigate risks and even turn regulatory changes into opportunities.


Recessions are complex events that challenge every facet of a small business, from consumer demand and credit access to investment decisions and workforce management. Preparing for these challenges involves a nuanced understanding and strategic planning that can make the difference between survival and closure.


  • Sahin, A., Song, J., & Hobijn, B. (2010). The Unemployment Gender Gap during the 2007 Recession.
  • Berkowitz, J., & White, M. (2004). Bankruptcy and Small Firms’ Access to Credit.
  • Dennis, W. J. (2011). Financing Small Business in America: Access to Capital in a Just-In-Time Environment.
  • Federal Reserve Small Business Meeting Series (Various Dates). Small Business Credit Survey.

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