Business finance in a recession: funding your company through a downturn

This guide is for owners and directors seeing orders soften, customers paying later or costs rising faster than prices, and wondering whether to borrow, cut back or both. Smart Funding Solutions is a broker that arranges facilities from £10,000 to £20 million, but the first half of this guide is about what to do before you borrow at all. For more explainers, see our business finance guides.

01Why timing matters more than the product

Lenders mostly assess the past. They underwrite on filed accounts that may be a year old, plus recent bank statements. That creates a narrow window in a downturn: your accounts still show the good year, and your bank statements have not yet shown much strain. Apply in that window and lenders see a sound business planning ahead. Apply after two months of returned direct debits and an HMRC arrears letter, and the same business looks like a rescue case, with fewer lenders, higher costs and more security.

The practical rule: arrange headroom when you first see the downturn coming, not when the overdraft is full. An undrawn facility costs little or nothing in interest, and it is far easier to obtain from a position of strength.

02First steps before you borrow

1. Build a 13-week cash flow forecast. Weekly, not monthly, because payroll, VAT quarters and rent dates create sharp troughs that a monthly view hides. Run a pessimistic version with sales down and customers paying later.
2. Chase what you are owed. Customers stretch payment in a recession. Tighten terms for new orders, chase overdue invoices early and remember your statutory right to charge interest on late commercial payments. Our guide to chasing late payment sets out a process.
3. Cut or defer costs that do not protect income. Discretionary spend, surplus stock and underused vehicles go first; the people and capacity you need for the recovery go last.
4. Talk to existing lenders early. If a covenant test or repayment looks at risk, a lender told in advance can agree a capital repayment holiday or term extension. One told after a missed payment has fewer options and less goodwill.
5. Talk to HMRC before the deadline. A Time to Pay arrangement can spread tax owed, but HMRC expects you to make contact before the payment is missed. Our page on Time to Pay versus a tax loan compares the two.

03Funding options and how they behave when sales fall

Facilities that look similar in good times behave very differently in a slump. The question is not just "can I get it?" but "what happens to it if trading drops further?"

For a sudden, one-off shock such as a lost contract or an unexpected bill, see emergency business loans. For a predictable annual dip, seasonal finance is the better frame. A recession is different from both: it is prolonged and its end date is unknown, which is why matching the facility to a plan matters.

04What lenders look at in a downturn

• Direction of travel: month-by-month bank credits matter more than last year's turnover. A gentle, explained decline is very different from a sudden fall.
• Sector exposure: lenders tighten appetite for sectors hit hardest, such as discretionary retail, hospitality or construction, regardless of the individual business.
• Existing debt and stacking: several short-term lenders already collecting daily or weekly repayments is a common reason for decline.
• Arrears: HMRC debt without an agreed plan, returned payments and county court judgments all weigh heavily.
• The plan: what the money does, how it bridges to recovery and what happens if the recovery is slower.
• Director commitment: personal guarantees are more commonly requested when trading is uncertain.

Facilities that look similar in good times behave very differently in a slump.

05Borrowing on the way out of a downturn

The harder moment can come after the worst has passed. The year of the dip ends up in filed accounts, and some lenders stop at the loss. Showing what has changed since then is the job. In one case we arranged, a dental laboratory's previous accounts showed a loss and declining net worth, which was enough for some lenders to stop looking. Its latest figures showed a move from an operating loss of around £58,000 to an operating profit of more than £20,000 on stable turnover, and the application was built around that recovery. A £50,000 loan for the dental laboratory was arranged. Up-to-date management accounts and an honest explanation of what went wrong, and what was fixed, are what make that case possible.

06Documents to have ready

07When borrowing is the wrong answer

Debt buys time; it does not fix a business that no longer makes money at its current size. If the forecast shows losses continuing well beyond the period a facility would cover, more borrowing usually makes the eventual outcome worse for creditors and for the directors who guaranteed it. Equity from existing owners, selling surplus assets, restructuring costs or a formal process may be better options.

Directors also have legal duties once a company is, or is likely to become, insolvent: they must give priority to creditors' interests, and continuing to trade and borrow when there is no reasonable prospect of avoiding insolvency can create personal liability. GOV.UK's guide to options when a company is insolvent explains the routes, and a licensed insolvency practitioner can advise early, when there are more choices. For companies already in a formal arrangement, see finance for a company in a CVA.

08Buying a business or assets during a downturn

A downturn is not only a defensive problem. For a business with steady trading and some headroom, it can also be a time to grow by buying a competitor, a customer book or equipment from businesses that are scaling back or closing.

Opportunities tend to appear in a few forms:

• Owners who want to exit. Some owners decide not to ride out another difficult period and become willing to sell at a realistic price, often with part of it deferred.
• Businesses in administration. An administrator may sell the trade and assets quickly, sometimes through a pre-pack. Buyers often have limited time for due diligence and limited warranties, so the risk sits more with the buyer.
• Used equipment and vehicles. Plant, machinery and vehicles from businesses reducing capacity can come onto the market, and asset finance lenders can fund used kit where its value supports it.

Lenders will look at the buyer first. They want to see that your own business is trading steadily through the downturn, that the purchase makes sense on cautious forecasts and that the combined business can carry the new debt if the recovery is slow. A buyer whose own figures are under strain will find funding hard to arrange, however cheap the target looks.

Be honest about why the opportunity exists. A business sold cheaply in a downturn may have problems that will not disappear when the economy improves. Our guide to buying a business from administration explains how those deals are funded and what lenders need.

09How we can help

1. We review your forecast, existing borrowing and recent bank activity with you.
2. We tell you whether new finance looks sensible or whether another step should come first.
3. Where borrowing fits, we approach lenders on our panel suited to your sector and current trading.
4. Lenders make the decision; you compare terms and choose. It is free to enquire; any broker fee is disclosed separately before you proceed.