How to Keep Businesses Alive During Economic Hardship

How to Keep Businesses Alive During Economic Hardship

COVID-19 took the world by surprise as we realized that this global economic recession was going to last longer than anything after the Great Depression post World War II. Every single country’s body of government had troubles with how they were going to keep their small and medium business enterprises alive, while a lot of already big successful companies were taking the world by storm.

               Here in Ethiopia, things were slightly different. Before COVID-19 hit, there was already trouble as the Locust invasion destroyed over 200,000 hectares of land. There were already 16.5 million people struggling to make ends meet, and this mass destruction pushed even more people into poverty. This already made it difficult for the people to recover, but soon after COVID-19 hit, which caused even more people to fall deeper into poverty. And it wasn’t just farmers in the countryside, it also hit businesses in Addis Ababa.

               The key factor for economic growth in a country like Ethiopia is peace and stability. The current political situation has caused investments to become eroded, as peace and stability determine everything including, supply, demand, trade, investment, and overall production. On top of this political uncertainty, the 2nd wave of the coronavirus has expected to take a large hit as more people were rendered from doing work.

So how can these small and medium businesses here keep alive and thrive during these extremely difficult times? The first option is through shifting to the internet and digitizing the workplace. For a very long time, it was determined that the internet would be the future of the world. But since COVID-19 hit, it has forced the majority of the world to shift their work and businesses online. A business needs to prove its speed and stability with this, and showing how it can remain just as good (or even better) on the internet. This digitization shouldn’t be a setback, it should be an advantage. Your company should refocus itself on the new opportunities that will come about with digitalization. As well as moving forward with digitization, your company should be working on systemic cooperation. There needs to be a multistakeholder collaboration to create systemic resilience against economic recession. A fabric of trust needs to be built and instilled across diverse stakeholders; whether it’s trust in various actors in a supply chain, or between employees in an organization.

In addition to the way your company can move forward in a time of crisis, there are also other ways you can prevent an economic recession from affecting your business to a point of failure. One of the best things that can be done is to create a short-term and long-term budget plan that includes a target for revenue, gross profit, and expenses. These things will help you maintain a healthy cash flow which will help cover funds to upgrade equipment, purchase necessary supplies, and even help cover payroll. Getting a small business loan will also help as it will provide long-term, low-rate financing without balloon payments or prepayment penalties, which will give your business better control over debt management. To do this, your business should maintain a healthy banking relationship. Banks don’t give out loans to every single business that comes to them needing one, so if your business has maintained a healthy relationship with the bank, they’re more likely to give you a loan.

A bank is one of the most crucial elements that can help out during a time of economic crisis. When a time like this comes, banks move money quickly into the hands of businesses, especially to those that are small and medium enterprises (SME). A bank will do this to allow the business to pay suppliers and meet current expenses. But for this to happen, the government needs to guarantee 100% of all credit extended. Central banks need to confirm that they will accept such guaranteed loans as collateral. Once this happens, banks should integrate the origination and servicing of these loans into their procedures. When these actions are put together, it will help speed up the disbursement so that the companies can receive this money while they still need it. It’s also clear that SME’s need the option to extend the maturity of a loan, as economic recession makes it much more difficult for a business to pay this loan back. Typically, a business would have to pay a premium to do so, and post collateral on term negotiated with the bank. Central bank need to encourage banks to do this by increasing the interest they pay on to bank reserves, provided that the businesses that took out the loans are eligible borrowers that guarantee to pay back the loan by the end of the year. Banks, therefore, need to reassure lenders that the maturity extension will not push these loans into the non-performing categories and also will not raise the capital charges for loans to punitive levels.

We all know and understand the difficulties that everyone is facing during these times and we can all work together to beat the economic recession. Through help from the banks, help from one another, and understanding we need to work together systemically then we’ll be able to bounce back ten times over.

By Seema Nasreddin

Sponsored by Bank of Abyssinia. However, the views expressed here do not reflect that of the institution.

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