LegalZoom’s interview with Valcor CEO, David Sussman: How Small Business Owners Can Cope with Inflation and a Possible Recession

Inflation is close to 40-year highs, with average gas prices at almost $5/gallon around the United States, prices in general up 8.3% since last year, and a bear market signaling that a recession could be coming.

A CNBC/SurveyMonkey survey in April found that more than 80% of small business owners believe the U.S. economy is heading for a recession, and 40% see inflation as their biggest concern.

We collected some bear market survival tips and talked to a range of U.S. small business owners to get a better sense of what they’re seeing as inflation continues to rise.

Recession-Prep Tips for Small Businesses

Here are some ways small businesses can prepare to ensure they’re as well positioned as possible to ride out the coming storm.

Increase Income

A first line of defense for financial readiness is increasing your business’ income. This can be accomplished in a number of ways, depending on what is feasible within a given sector or business model. Ideas include creating new products that fit the economic moment, such as lower-price versions of other products; raising prices on existing products; renting out space or other resources that are underutilized; and seeking loans.

Garrett Goldman, owner of State Creative, a web design agency in Oakland, California, has already done two of those things to help deal with the effects of inflation.

“We’re facing inflationary pressures for the first time,” he says. “We’re feeling it across the spectrum, from increased costs for supplies to employees asking for more pay. We’ve had to raise our prices, and we also secured a low-interest-rate loan a few months ago in preparation.”

Reduce Expenses and Conserve Capital

Another major strategy for riding out a recession is reducing expenses and conserving capital. Plans for growth or hiring should be put on hold. Operating expenses should be trimmed wherever possible. Layoffs may be necessary.

“Employees across the board needed raises to deal with their own inflationary pressures. In order to give raises to our critical staff, we had to release some of our less critical staff members,” Jonathan Green, the owner of Serve No Master, a company that trains people to build online businesses, says. “It was a painful decision, but it was either everyone drowns or we shrink the team.”

Additionally, outstanding debts may need to be restructured, and businesses that rent commercial space may be able to renegotiate their lease payments.

Slim Down or Adjust Your Products

Businesses should turn an analytical eye on their products to see if there are ways to increase efficiencies and reduce costs in creating the things they sell.

David Sussman, the CEO of Valcor, which offers consulting on business restructuring, debt mediation, and capital acquisition, suggests a comparison between a small Italian restaurant with a dozen menu items and The Cheesecake Factory, “where the menu looks like a Yellow Pages.” The Cheesecake Factory has to store the ingredients for all those menu items, an expensive prospect, while the Italian place can buy and store fewer types of items.

“Slim down the options you’re making available to your customers,” Sussman says. “Analyze what is selling. Put the weak products to the side for a while.”

In some cases, businesses can keep costs low by changing the formulation of products or finding materials from new suppliers. That’s what Victor Garcia, owner of Mexican-style ice cream shop Sol Dias, did when the price of the cream base he buys jumped up by 85%.

“After many atrocious mistakes, we now make our own base,” he says. “It’s amazing and better than our no-shame, no-warning, price-hiking supplier.”

How Small Businesses Are Affected By Inflation

Rising prices and increased interest rates hurt businesses in a multitude of ways. Here are some stories from business owners.

Rising Cost of Supplies and Shipping

One of the biggest challenges to small businesses right now is the skyrocketing price of materials and ingredients, along with higher shipping costs. Garcia reports that the price of the vanilla he imports from Mexico has increased by 180% in the last year.

And one of Valcor’s clients, a high-end pizzeria that imports many of its ingredients from Italy, saw the minimum order demanded by its supplier suddenly jump from $300 to $600 due to changes in shipping costs. The restaurant can’t afford to buy food that it may not be able to use, so it had to switch to local sources for ingredients, which is changing the taste and quality of its products.

Dampened Consumer Spending Power

With inflation affecting individuals and families as well as businesses, customers are feeling the pinch just like entrepreneurs are. While shoppers haven’t substantially slowed down their spending as of early summer—opting to reduce saving instead—a reduction in spending is surely coming if inflation continues.

Some business owners are already seeing a pull-back, Jane Kallinger, who runs the website SewingFromHome and teaches sewing lessons that are typically full says.

“I have experienced quiet periods before,” she says. “Lately, however, I have seen a considerable drop-off in the number of students, and inflation—coupled with the cost-of-living crisis—is causing even my relatively low-priced lessons to become unaffordable to many.”

Increased Interest Rates and Tightened Lending

With the Fed recently hiking its benchmark interest rate by 0.75%, interest rates are rising across the board. As a result, Sussman says, many lenders realize that potential clients will likely not be able to meet debt payments at these higher rates. This reality has made lenders tighten their standards, leaving small business borrowers with fewer options for financial assistance.

“Cashflow is the lifeblood of a business, so when customers aren’t spending as much because they’re concerned about their own finances, you oftentimes have to go to a lender and raise money,” Sussman says. “But now those lenders are becoming a bit more risk-averse. So cashflow is really coming to a screeching halt.”

Time to take action

Businesses have had a rough ride the last few years as the pandemic threw a wrench in “business as usual.” Unfortunately, the roller coaster continues as our economy suffers whiplash from crises around the world.

“Inflation has been my biggest nightmare after COVID-19,” Paul Mallory, the co-founder of ConsumerGravity, a brand analysis firm says. “I thought supply chain issues were finally over, but we are back at square one due to budget restraints.”

While it’s normal to feel discouraged and anxious about what’s next, don’t spend long in lamentation mode. Businesses that take decisive action and make hard choices as quickly as possible are more likely to make it through the coming years intact.