Top 8 Reasons to Start a Business in a Recession

Recessions, or even a volatile market we recently experienced due to COVID-19, are difficult times. There’s a great amount of uncertainty, people losing their jobs, and a direct hit on cash flows that can place businesses in dire straights. But it doesn’t have to be all bad. 

Current businesses are finding ways to pivot their business models, revisiting their budgets, and developing new forecasts to minimize their burn rate and maximize their available cash runway. They’re surviving and finding ways to thrive, but for those looking to start a business, now may be one of the best times to do so. 

By leveraging a one-page planning system, starting a business during a downturn can potentially help you capitalize on a weaker economy and avoid many of the difficulties affecting current businesses. To help you get started, here are eight things you should keep in mind to successfully start your business during a recession.

1. Find answers to new problems

Difficult economic times lead to new problems. These problems stem from a current need or pain that people are feeling and that often doesn’t have a readily available solution. Understand how consumers handle this issue now, and who provides the best current solution to help define why they will switch to you. 

Focus on positioning your business, product, or service as that new and better solution. Even if there are substitutes available, show how your solution is more immediate, reliable, affordable, etc. In the case of COVID-19, possibly the best way to approach a new business idea is starting with remote, delivery, or as-a-service variations of products or services that haven’t pivoted effectively.

2. Cheaper, Better, Faster

As a fledgling business, there’s a good chance you’re starting from your home, have minimal employees and very little overhead to maintain at this point. That combination puts you in a great position to provide an inexpensive solution and win over customers. In an economic downturn, businesses and consumers alike are looking to cut costs, which may allow you to step in with your answer.

If you’re able to help save them money and combine that with better service or a faster turn-around time, there’s a good chance you’ll turn them into long-term customers. You can establish a relationship with them now as one of the reasons they were able to survive through the crisis, potentially turning them into advocates for your business. As the economy recovers, you can always look to increase prices or add new services that these customers will be more willing to accept due to how you helped them before.

3. More room for competition

If you’ve wanted to start a business, but always thought the industry was too crowded, now is the ideal time to enter the market. Both large companies and smaller businesses are struggling to adjust and survive in different ways during a crisis, meaning your competition and market is now vulnerable to a new entrant. As with acquiring competitive customers, if you can leverage your lean position and start by working from home, there’s a better chance that you can weather the economic storm.

Possibly the best thing you can do to aggressively take on the current competition is to go out (remotely) and ask prospects “How do you feel X company is serving you during this crisis?” and “What do you wish they were doing differently?” Answers to those questions can help you better position yourself to avoid the mistakes of current incumbents and provide a better solution for current customers.

4. Inexpensive supplies and materials

Continuing with the trend of things being cheaper, in a recession, companies are more than likely selling off products, assets, or equipment at a much lower cost. When you’re just starting out, this can help minimize overhead such as office rent and software, as well as one-off starting purchases such as laptops, printers, etc. If you’re starting a business from home, this will likely only affect larger starting costs, but it can still be beneficial if massive overhead costs have been a concern or even prevented you from starting in the past.

The best thing you can do is identify vendors, business partners, and suppliers that are needing to move inventory or sign-up new clients at a reduced rate. This can potentially help you save costs up-front and even negotiate long-term payment deals that will remain once the economy begins to recover.

5. Better credit options

As businesses look for emerging relief options like the Paycheck Protection Program and SBA Economic Injury Disaster Loans, to help them mitigate loss and improve cash flow, you should be looking at more traditional credit options. There’s a good chance that banks and credit card companies are now dropping interest rates to help encourage spending. This is good news for those just starting a business, as loans and credit cards now carry a lesser penalty, as well as the potential for higher credit limits. 

Do keep in mind if you do end up taking out a loan, that you’ll need to have a solid business plan, including financial documentation and forecasts to apply through most lenders. Not only does this help support your application, but it assures that you are thinking long-term and will know how to manage the funds effectively. 

We have plenty of free business planning resources available to help get you started.

6. Access to investment funds

One thing that doesn’t typically end during a financial crisis, is investors looking to fund startups and small businesses. Often times, angel investors are looking for promising prospects that allow them to move money out of the stock market and into a potential money-making venture. Not only does this provide more security for them, even if startups are inherently risky, but it provides more opportunities for you and your business to get additional funding.

Now the key thing to keep in mind when pitching to investors is that you need to have a thorough executive summary available for review. You’ll also want to focus on how your business will work within an economic downturn and how you’re using some of the earlier points in this article to cut costs, deliver better service, etc. 

Be sure that you can demonstrate your market position, competitive advantage, and any proof that your target market is actually looking for an alternative option. Additionally, you’ll want to have financial planning that displays how your business will function past the crisis, showing that you have put long-term thought into multiple scenarios. This can help your business appear less risky and assures potential investors that this isn’t just a quick grab at making a buck during a down market.

7. Less competition entering the market

A healthy economy attracts more competition. Established businesses are thriving and more and more startups are taking chances at starting or expanding their business. All of that seemingly evaporates in a crisis, but effectively leaves room for those willing to take a chance.

The fact that you will inherently have less competition entering the market is one of the core benefits of starting a business during a downturn. You don’t have to worry about new entrants leveraging the same position as you and can instead focus on taking on established competition. However, you will need to consider this eventually and need to use this advantage to prepare your business to take on more and more competition as the market improves.

8. Set up for long-term success

Balancing the short-term benefits of launching in a crisis with long-term post-crisis planning is necessary for your business to succeed. However, it’s not as difficult as you’d imagine, primarily because you’re building a business when times are tight. This helps ensure that you are relying on growth planning methods and regularly adjusting your strategy based on performance, the market, and consumer behavior.

You’re actively developing and growing a business when consumers are less likely to engage in frivolous spending habits. You’re solidifying your brand as a staple of trustworthiness and stability in an environment where almost everything is uncertain. Starting your business now assures that you know how to function when times are lean and that those habits will inform your long-term planning methods.

Putting it all together to start your business

As you can see there are many benefits to starting a business during a recession but that doesn’t mean establishing one will be easier. You still need to develop a business plan, test your business idea, and establish a financial plan that assures your business is feasible. It’s especially important in a volatile economic environment that you plan ahead and ensure that you can take advantage of the benefits listed in this article, rather than fall prey to the difficulties of established businesses.

Again, this doesn’t have to be a lengthy process and you can simply start with a one-page plan that you can revisit, update, and adapt as your business grows. If you need some inspiration to help get your plan started, check out our sample business plan library, and download our free business plan template.

Start planning today and find ways to leverage the current economic difficulties to help your business idea grow into a lean, recession-proof business.