Preparing your US small business for a recession: cash, credit, costs, people and the tax rules that help

Every few months someone asks us whether a recession is coming. Our answer is that nobody can time it, including the economists who are paid to try. What an owner can do is make sure the business survives one when it comes, and is positioned to grow when competitors pull back. For a European-owned US company, some of the usual American safety nets work differently, starting with government-backed loans.

Where the economy stands in October 2026

The official numbers at the time of writing:

That is a growing economy with a slow hiring pace. It says little about next year. An advance GDP estimate is the first of several, and it is revised as more data arrive. Turning points of the cycle are only dated in hindsight. Treat the table as the weather today, and prepare the business for the seasons.

What counts as a recession in the United States

Europeans often use the rule of thumb of two consecutive quarters of falling GDP. In the United States the dates are set by the Business Cycle Dating Committee of the National Bureau of Economic Research, a private research organisation. It describes a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months, and it weighs depth, diffusion and duration together. The most recent peak it has identified was February 2020, and the most recent trough April 2020.

Because the dates are set in hindsight, a business owner usually feels a downturn long before anyone confirms it. For planning, the official label matters far less than your own leading indicators: the order book, the sales pipeline, days to payment from customers and the mood of your best clients. Watch those monthly.

Step one: a cash stress test

The first question in any downturn is how long the company can pay its bills if revenue falls. We run a simple test with every client. Here is a worked example for a small foreign-owned US services company:

Now repeat it with revenue down 40 percent, with your largest customer paying 60 days late, and with both. If the runway falls below six months in any scenario, act now while the bank and your customers still see a healthy business. The test also shows which fixed costs could be turned into variable ones, for example by moving from permanent staff to project contractors for non-core work.

Step two: arrange credit before you need it

Banks lend most readily to companies that do not urgently need money. A line of credit opened in a good year is the cheapest insurance a small business can buy. Our page on a business line of credit explains how a US company builds the history to get one, and our guide to business credit, D-U-N-S and Paydex covers the company credit file that lenders check.

One safety net American owners take for granted is closed to most European owners. In 2026 the Small Business Administration restricted its loan programs to businesses owned by U.S. citizens or U.S. nationals whose principal residence is in the United States, and in its release of 9 March 2026 it said the policy extends to all SBA-guaranteed loans. A company owned from Europe should plan as if no government-backed loan will be available in a downturn, and keep its own reserves and private credit lines accordingly.

Other sources worth preparing in advance: a shareholder loan facility from the European parent, documented at arm's length; agreed payment terms with key suppliers; and a clear view of which assets, such as receivables or equipment, could secure financing.

Step three: costs and people

Payroll is the largest fixed cost in most small businesses, and US employment law gives an owner more flexibility than European law does. Employment in Texas is at will, so there is no statutory notice period or severance for an individual dismissal. Larger cuts are different: the federal WARN Act applies to employers with 100 or more employees, not counting part-time staff, and requires advance notice before a plant closing affecting 50 or more employees or a mass layoff at a single site. Our guide to HR basics for a US small business explains the rules and the limits of at-will employment.

Flexibility is not a strategy, though. Teams that are cut quickly and carelessly lose the people who could have carried the recovery, and the remaining staff start looking. Before cutting jobs, we look with clients at these levers, roughly in this order:

1. Pause hiring and non-essential projects.
2. Renegotiate rent, software and service contracts, many of which have room in a downturn.
3. Move bonuses from guaranteed to results-based.
4. Reduce hours by agreement where the business is seasonal.
5. Only then, targeted reductions, done fairly, documented and explained.

Step four: customers and prices

In every downturn we have seen, the businesses that came out stronger held on to their best customers and kept talking to them. Practical moves:

• Know who pays and who is at risk. Rank customers by revenue and by payment behaviour. Shorten terms for the slow payers before they become bad debts.
• Protect value before cutting price. Offer a smaller package, a longer contract at a better rate or a payment plan before an across-the-board discount, which is hard to reverse.
• Spread your risk. If one customer is more than a fifth of revenue, start building the second and third now.
• Keep service visible. In a downturn, customers notice who still answers the phone. Our guide to customer service the American way shows what American buyers expect.

For importers, watch input costs too. Tariff changes can move margins faster than demand does, and our page on US tariffs on imports from Europe tracks the current rules.

Step five: the tax rules that soften a bad year

Tax law cannot rescue a business, but it changes the cash picture of a bad year and of a recovery. Three points we check with clients:

Losses carry forward

For a C corporation, a net operating loss from a tax year beginning after 2017 is carried forward to the following years. The deduction in a later year is generally limited to 80 percent of taxable income, computed before the loss deduction itself, and carrybacks are limited to special cases such as farming losses. A loss year therefore reduces tax in the recovery, rather than producing a refund now. Keep the books clean so the loss is documented; our page on bookkeeping and records covers what to keep.

Investment can be written off at once

The One Big Beautiful Bill Act reinstated the 100 percent special depreciation allowance for certain qualified property acquired and placed in service after 19 January 2025. For tax years beginning in 2026, the Section 179 expensing limit is $2,560,000, reduced once qualifying purchases exceed $4,090,000. A company with cash that buys equipment cheaply in a downturn can deduct it in the year of purchase.

Estimated payments follow the income

If profits fall, adjust quarterly estimated tax payments rather than overpaying and waiting for a refund.

Step six: agree the parent's role in advance

Many of our clients run the US company as a subsidiary of a European business. In a downturn, the relationship between the two decides a great deal, and it is far easier to settle while both sides are calm.

• Funding commitment. Write down how much the parent will put in, in what form (equity or a loan) and on what trigger, so the US managers know what they can count on.
• Currency. If the parent funds in euros, pounds or francs and the US company earns dollars, exchange rate moves can help or hurt at exactly the wrong moment. Decide whether to hold a dollar reserve in the US account.
• Decision rights. Agree which cuts and price changes the US management may make alone. A US team that waits weeks for head office loses customers to competitors that decide in a day.
• Intercompany charges. Management fees, licence fees and the prices of goods supplied by the parent should be documented and priced at arm's length, and reviewed when volumes change, because both tax administrations will look at them in a loss year.

A short written memo covering these four points is one of the most useful documents a European-owned US company can have when the economy turns.

A one-page recession checklist

• Cash runway calculated for three scenarios, reviewed every quarter.
• Line of credit in place and unused.
• Reserve of at least six months of fixed costs, held in the US company or committed by the parent.
• Top 10 customers ranked by revenue and payment risk.
• Supplier contracts reviewed for price and exit terms.
• Fixed costs that could become variable identified.
• Staffing plan for a 25 percent revenue drop, written down before it is needed.
• Tax position reviewed: losses, depreciation, estimated payments.
• A list of opportunities to act on if competitors weaken: hires, customers, small acquisitions.

The last point is the one owners forget. Recessions end, and the owners who kept a reserve are the ones who can hire good people and buy cheaply while others cannot. Our overview of US business risks puts the downturn in the context of the other risks a European-owned company manages here.