The signs are clear: We are likely heading toward a recession. In fact, we may already be in the beginning stages of a recession following a historic period of sustained, robust growth that began after the 2008 financial crisis. What is a recession? The National Bureau of Economic Research (NBER), keeper of the official recession record, defines it as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Typically a recession lasts 1-2 years, so prepare for an impact on your business. If most of your clients are high net-worth individuals, you will be more protected. If you rely on clients, even executive level professionals, whose purchasing power relies on unguaranteed income, your interior design business is likely more vulnerable.
Here is everything interior designers need to know about what a recession would mean for their businesses (side note: the below includes tips for managing your finances during tough times, but you should speak to a financial advisor to create a financial plan that is right for you and your business).
How a Recession Impacts the Interior Design Industry
- Higher interest rates means that debt is more expensive:
The percentage of interest you pay on a loan is determined by interest rates. The Federal Reserve has significantly raised interest rates in recent weeks after a 14-year period of historically low levels. This move, done to combat high inflation, has a large ripple effect on the economy. Some of the specific areas of impact for interior designers include:
- Mortgages are more expensive, driving down the number of new home buyers.
- Construction loans are more expensive, shrinking renovation budgets and slowing down real estate development.
- Company and personal debt are more expensive; variable loans, like credit card debt and student loans, require larger monthly payments and accrue interest at a higher rate.
Clients' finances are uncertain:In a recession, people have less purchasing power. They are also affected by the high price of debt, on top of paying higher prices for essential goods, facing the possibilities of layoffs, and almost certainly reduced income in the form of bonuses. Also, consider the financial impact on clients who have their wealth invested in the stock market, which declines in a recession. The ultra-high-net-worth clients are more protected because their assets are so significant and typically they do not rely on an annual income for their wealth. But all other clients will have less money to spend on design services, putting potential projects on hold, and potentially halting ongoing projects to stem their losses.
- Vendors may be compromised:
Small businesses feel the squeeze of a recession more than larger companies. If your vendors are struggling with high debt loads on top of having low inventory due to high materials costs and delays due to the supply chain disruptions of the last two years, your go-to boutique vendors might go under.
How to Adapt Your Interior Design Business During a Recession
- Aggressively pay down debt:
The power of compound interest can make or break you, especially in a high interest rate environment. Every month your debt accrues greater interest, adding to your overall load and bumping up your monthly payments. Reducing your debt as much as you possibly can will help stabilize your business as the recession drags on. Find ways to cut your monthly expenses and dip into your savings to eliminate debt, since your savings are not accruing positive interest anywhere close to the rate your debt is accruing negative interest.
- Check in with clients:
Don’t be afraid to have difficult conversations with your clients. You can tactfully address how a recession might affect planned and ongoing projects. This gives them the opportunity to tell you they need to scale down, for which you can then prepare. Maybe your clients have not thought through the implications of the recession and this conversation will get them to make decisions earlier than they would have otherwise, again helping you prepare for the impact to your business.
- Change your fee structure, even if temporarily:
Don’t lower prices, just change when you get paid and on what basis. Charging a flat fee, or implementing a system where clients pay in advance for each stage of a project, can help you lock in a predictable cash flow and limit the risk of being held holding the bag if a project gets shelved while it's in progress.
- Communicate your value-add through branding:
Your branding (your website, social media, panel talking points, etc) should answer the question, “Why should clients hire you instead of another designer, or just do it themselves?” You're not going to be everything to everyone. Identify what you do better than anyone else and push that message.
- Consider offering eDesign: eDesign services do not suit every interior design brand, but if you can create eDesign services that do not dilute your value, doing so opens up your potential market considerably and creates a revenue stream that doesn't add overhead.
How to Make the Best of a Bad Situation
Find opportunities to improve your business during a recession. For example:
- Find developers who are planning long-term projects:
Real estate investors, like developers, often use recessions and periods of lower buyer demand to snap up properties at a discount – assuming they don’t have to take out loans to buy them. These developers then begin multi-year building plans for new residences or commercial uses. Getting hired as the interior designer for these projects can fill in the gaps in your pipeline.
- Address your flaws: Weaknesses in your business will be glaring through these lean times and you have the chance to fix those inefficiencies as projects slow down. Get your books in tip-top shape, improve your policies and procedures, and organize your office.
- Invest in sweat-equity marketing: With your rarely found free time, improve your digital presence. Make your social media channels outstanding. Call your contacts and strengthen relationships with your network.
A recession is a difficult time for any small business, especially interior design firms, which rely on discretionary income to thrive. Many individuals and commercial developers will need to cut their budgets as they face economic headwinds. Facing the facts head-on and planning accordingly will go a long way in protecting your business for the next 10-18 months. Use the recession as an opportunity to make positive changes in your business that will help you grow as we eventually move into the period of prosperity that will surely follow after this difficult time.