Businesses Rose Above Defeat to Survive the Great Recession
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UPDATED: Feb 8, 2021
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The Great Recession hit America like a natural disaster, creating a downward shift in nearly every facet of the economy. Homes were lost, unemployment skyrocketed, and businesses faced bankruptcy and closures.
From 2008 to 2010, more than 200,000 small businesses disappeared.
But the downturn did not stagnate. Similar to the process after a devastating hurricane or tornado, consumers slowly began to rebuild. Across the country, many businesses, both small and large, hung on during the recession and the slow years following it, and were able to remain open. Several business owners and experts told loans.org how they were able to overcome both a national recession and more niche-related downturns in their industry.
Recover, Rebuild, and Readjust
The ability to recover after a downturn is determined by many things, spanning from the preparation beforehand to the access to business loan capital afterwards.
One defining factor of a downturn is the time needed to recover.
Since the Second World War ended, two major economic downturns hit the United States. The recession from 1982-1983 caused major economic issues, but the return to normalcy happened quickly. The most recent downturn from 2007-2009 did not rebound in a similar fashion.
Signs of economic recovery, such as reduced unemployment and job creation did not improve in one or two years like it did in the 1980’s recession. Lagging employment still affects many today — six years after the Great Recession began.
According to a recent Census study, the job creation rate was 16.4 percent in 2006 right before the downturn occurred. It dropped to 11.6 percent in 2009. In 2011, it only grew to 14.1 percent. The 2.3 percent difference means that there were 3.4 million less (gross) jobs created annually in 2011 as compared to 2006.
The effects on consumers — high unemployment and home foreclosures — quickly trickled down and hurt businesses’ bottom lines.
Companies were hurt because of a reduction in disposable income and consumer spending. Nearly 70 percent of the U.S. economy is consumer spending, so a decrease in spending spurs a recession, according to Greg Gallo, co-founder of wealth management firm Opus Group.
During a financially strained time, the good and the bad in each business become evident.
“Good managers know the difference and respond decisively to minimize the weaknesses and maximize their strengths,” he said.
Capital Assists When Available
If a business failed to plan ahead and save up enough reserve capital to get over the downturn, it could turn to business loans. One of the most important means of assistance is business funding and access to capital. Despite its potential impact, credit is usually limited during these times. Credit and loan availability were the biggest problems for Lasherrick Terrell, CEO and founder of Biz University Services.
Terrell was impacted by the housing collapse the most. When the real estate market suffered, other associated businesses such as Terrell’s business dwindled as well.
His bank cut credit limits and money that was previous available to borrow was no longer available.
“The only threat I see is credit, the availability of loans and credit cards,” he said.
His business was rejected for an American Express small business loan and he is still awaiting reply from the Small Business Administration. For him, the only business loans in the market were peer-to-peer loans and alternative loan formats.
Even lenders agree that capital diminishes during times of need. This becomes a burden for small businesses according to Rohit Arora, CEO of Biz2Credit.com.
Gallo agrees with both Terrell and Arora and said a catch-22 occurs in the lending world during economic downturns.
“As needs increase, availability decreases,” he said.
If a business is able to access capital, another hurdle comes into play. Arora said many small businesses must accept the added cost required to borrow business loans during recessions.
“While rates were at historical lows [during the Great Recession], small business owners were rejected more quickly than large companies in search of capital,” Arora said.
Furthermore, small business lines of credit can be recalled from borrowers which usually does not happen to large corporations.
When credit is limited or revoked, small business owners must decide if they can live without the funding or they must look towards other lenders with added risk or higher interest rates.
A recent survey from Biz2Credit found that large banks only approve 17.4 percent of loan applications. Two years previously, still in the post-recession years, the approval ratings were in the single digits.
If business loans are not available, the solution could be a re-organization of the current business model.
Ian Aronovich, CEO and cofounder of GovernmentAuctions.org, credits unique thinking to saving his business. His company’s monetization method, which was established in 2002 when he started the website, was no longer working during the downturn. Customers would sign up for a yearly membership but then fail to renew it for the following year. Aronovich realized that the company was not just hovering in place, but was “on the verge of free falling toward disaster.”
He decided to change that.
“We decided to focus less on the now and instead concentrate more on sustained growth for the future,” he said.
Aronovich and his business partner decided to stop charging an annual membership fee of $39.95 and to provide a free trial offer in addition to a recurring monthly subscription fee of $18.95.
The situation eventually improved their business model.
“As our business faced potential collapse, the crisis provided an opportunity for us to try out a new revenue model,” he said. “We started attracting and retaining more members as well as generating more income for our business.”
The Business Medium and Size Matter
Sometimes preventative measures are already ingrained in the business because of the company’s focus and its overall size.
The Great Recession did impact the American economy in a broad sense but some areas were able to remain strong during this time. One of the strongest areas that is almost recession-proof is health care. Employment in the healthcare sector actually grew during the recession, adding 428,000 jobs from December 2007 until June 2009.
The economy is strengthened by all businesses, even if they are not recession-proof. If businesses main focus is in a vulnerable medium that fluctuates frequently such as construction or real estate, owners can always extend their reach to more stable mediums.
Tim Kerin did just that with his multiple businesses.
As the current owner of Learning Lessons in Business as well as four other small businesses, Kerin started out 25 years ago with his wife and decided to expand on their cleaning jobs and bought a commercial cleaning franchise. The couple experienced their own company financial issues and almost lost their house.
They were able to recover from their personal downturn, and created new businesses that shielded the couple from future economic downturns. These expansions included starting a labor company and a commercial light construction business.
Many years later when the economy tanked during the Great Recession, they were prepared and did not suffer in a similar way.
The type of business is not the only indicator of how a recession will impact it. The size of the business, whether it is a small one-person operation or a multi-billion dollar organization, drastically impacts the likelihood of recession survival.
When small businesses operate during a recession, they have to deal with the likelihood that their customers and suppliers face similar issues. Arora said small business owners should watch their customer’s actions to see if they could enter bankruptcy.
“If your big customers go out of business, you could go out of business,” he said.
Arora suggests that owners keep at least one year’s cash on hand in case an economic downturn occurs.
Another threat is the failure to diversify. Because many small businesses lack diversified revenue streams, Gallo said that recessions can be traumatic, if not fatal.
“If a specific product or service is weak, big business that is diversified can utilize other revenue sources to weather the storm,” he said. “For small businesses with concentrated revenue streams, life is not so simple.”
But large industries are not immune to these factors and can fail because of the same lack of diversification seen in some small businesses.
The auto industry used to be a strong multi-billion dollar business but it fell quickly during the Great Recession. As consumer spending dwindled and the desire for gas inefficient vehicles dropped, auto manufacturers such as General Motors and Chrysler suffered large scale drops and eventually had to be bailed out by the government.
The recession’s impact on American businesses was sweeping, affecting almost every industry. Years later, despite many business closures and consolidations, millions of businesses survived.
This could be because of their ability to forecast and prepare for economic downturn.
Kerin advises owners to look at everything, think in a non-standard way, and eliminate overhead by operating in a “lean and mean” manner.
“You have to learn a business inside and out, all aspects, so you can control it better,” he said. “You have to take a very proactive stance to be successful.”