Amidst a Declining Global Economy, Financial Experts Warn Business Owners: Act Proactively and Defensively

Inflation is at record levels, along with personal, corporate, and government debt, while wages have stagnated and consumer confidence levels have plummeted.

The cracks are starting to show in our economy. According to the Federal Reserve Bank of St. Louis, delinquencies have increased consistently over the last three years. All economic indicators are flashing red right now, and financial experts say it's time to get ready for tough times ahead. In fact, many economists say a recession is all but inevitable at this point.

While the global economy declined rapidly at the onset of the 2020 pandemic, the truth is that this was always going to be the outcome. Most countries throughout the world had been spending recklessly for years, leading to record setting inflation. And that, experts say, is a ticking time bomb buried deep in the global economy.

To put this in perspective, a grocery order today compared to the same order just a few years ago is more than a 400% increase in cost for most parts of the United States. The UK is facing similar challenges, with food costs increasing by 31% over the same time period. Crude oil experienced similar inflation, with a staggering 460% price increase since 2020 and this phenomenon can be seen in every product or service you may want to purchase today.

Noted economist and founder of the investing community, Freedom Founders, Dr. David Phelps, says this is our new normal for the foreseeable future, unfortunately.

"Inflation may be decreasing from its recent 40-year high, but what people don't understand is that the inflation index is a "rate of change"—not a fixed number. Unfortunately, instead of pulling back on, or eliminating the economic policies that led us here, our elected officials are continuing to double down on them, so the inflation problem is here to stay for the foreseeable future. The Inflation Reduction Act, passed in 2022 and hailed as the magic bullet to solve the inflation problem was filled with pork barrel deficit spending— meaning, more printing of the dollar to fund a government that has no spending guardrails," he explained.

Phelps recently spoke at Johns Hopkins University on this exact topic.

Inflation affects everyone, he says, and when it gets to a certain point, it can force the economy to a halt because consumers simply don't have the money to spend. But there is one demographic that is particularly affected by this, and that demographic is small business owners.

Entrepreneurs tend to be more sensitive to economic downturns because they typically don't have the same financial resources or cash reserves that their larger competitors often do. This means that in many cases, a few slow months could destroy a company because it has no savings or access to capital. Once they're unable to keep up with payroll, a company is essentially over with.

Financial experts warn that everyone, but especially business owners, should be working to strengthen their financial position.

The first step is to reduce or eliminate unnecessary debt right now because of the strain it puts on a budget. Doing so frees up valuable capital that can be better spent on growth or set aside as savings.

Phelps explains the situation, "Recently, the controversy and debate over raising the government debt ceiling ended in "compromise" by extending the debt ceiling for another two years — past the next presidential election. No one is willing to have the hard conversations. When economic challenges hit, people tend to lean more heavily on credit, including credit cards, personal loans, auto loans, and mortgages, rather than reigning in their spending or increasing their income, and this is exactly what we're experiencing right now.

"Total household debt rose to $17.7 trillion in the second quarter of 2024, according to the latest Quarterly Report on Household Debt and Credit. During that same period, mortgage balances climbed to $12.44 trillion, while auto loan and student loan balances also increased to $1.616 trillion and $1.75 trillion, respectively, while credit card debt grew to 1.115 trillion.

"It's true that debt can be leveraged to handle financial emergencies, but this can be incredibly dangerous because adding additional debt when you're already facing adversity can quickly sabotage one's budget, causing it to spiral out of control, economically speaking."

Phelps recommends that business owners have at least three, but ideally six months of operating expenses set aside in a savings account they can access quickly. This allows you to capitalize on opportunities or handle unexpected expenses without paying the added premium that comes with debt, in the form of interest and fees.

It's also important to reduce expenses though, which can quickly pile up when times are good and you're not scrutinizing them quite as closely as you should. When you review your recurring monthly expenses, you'll probably find at least a few subscriptions to software, publications, and other resources that you aren't using anymore. These are prime opportunities to cut unnecessary costs. In fact, an economic downturn is a lot like a wildfire in that it burns away the undergrowth—in this case, costs for products and services you no longer need. Phelps explains that this is a good time to evaluate all of your expenses and look for ways to streamline your business.

But while we should eliminate unnecessary debt, we should work to ensure we have access to plenty of business credit, says Amanda Webster, COO of Fund&Grow.

"The same way that when you turn 18, you don't just immediately have a strong personal credit profile, it's the same with business credit. You can't just open a business and go, okay, now I want some business credit. It doesn't happen overnight—even when we're working with clients, we can't just magically get them $500,000 in business credit for a brand new business. It doesn't work that way. You can't expect to have it when you need it if you didn't start early enough, so you have to start building business credit well before you need it," she explains

Webster expands on this, saying, "Depending on how much you need will determine how much time and effort it will take, so if you're only looking for $100,000, the process is very different than if you're looking for $500,000. The important thing to remember is that when the economy goes down, the available credit can also go down. It's not as directly impacted as the more traditional personal credit market, but it still has an impact. So if, or rather, when credit becomes harder to get due to economic factors and you didn't do the work ahead of time, you're going to find yourself between the proverbial rock and a hard place. Building the relationships (and credit) over time and making sure you're applying the right strategy and using your credit properly—all before you need it is the key. Think of business credit like a fire extinguisher. You can't exactly run to the store to buy one after an oil fire flares up in your kitchen...you need it when you need it. Business credit it the same."

The process itself is relatively simple, Webster says. The challenging part is knowing which products—out of the thousands that are on the market, are best for your situation. After that, it's critical to understand how business credit operates compared to personal credit because they are completely different.

"One thing that we are adamant about is you can't just go apply for everything. You need to actually understand where you're at, the industry you're in and how creditors view it, your personal credit, what each lender is looking for, and which ones to actually apply for. So when you're going to get business credit, the amount of homework and strategy planning you need is far greater than when you're looking to increase it. So the process has to be strategic because you could destroy your personal and business credit by doing it wrong.

"Now, on the other side of that is increasing your business credit, which is all about how you use your accounts. They don't always care as much about your business credit score or your payback score—don't get me wrong, you want it to be healthy and not have any derogatory marks, but the lenders are going to carrefour more about how your relationship has been with them and how you have used your credit with them. So understanding the correct way to use business credit, and it works completely differently than personal credit, is what will then land you the ability to increase the business credit because unlike personal, you can exponentially increase your business credit far faster just by using it in a very aggressive and healthy manner," she said.

Entrepreneurs need to take these steps, according to the experts, to create financial resiliency in their businesses. As the economy continues to weaken, revenue will decline, which means layoffs. This means fewer consumers with money to spend in the economy, which leads to even more layoffs. It doesn't take a genius to see how this can quickly spiral out of control.

While times like these can be scary, they also tend to be when the biggest opportunities arise. In fact, some of the most successful companies in the world, including Sun Microsystems, Uber, Microsoft, Airbnb, and Slack, to name a few. And according to Fortune magazine, over half of Fortune 500 companies were started during a financial crisis.

The key, says Phelps, is to build a financial foundation that enables you to capitalize on opportunities you come across.

"Right now, it isn't about swinging for the fences. It's about making the smart money moves by becoming more financially resilient. This means reducing debt, increasing profit margins, and minimizing risk. It also means becoming more valuable to your customers so that you can retain more of them and the cashflow they provide, through the hard economic times we have ahead of us. And it means being prepared to capitalize on the opportunities that tend to arise during times like these," he explains.

With the challenges we're currently facing in today's economy, coupled with the additional challenges looming just over the horizon, it's clear that the status quo isn't going to work. Surviving, or better yet, thriving, through the coming years will require a combination of the right financial decisions, proactive preparation, and mental toughness.