Jul 06, 2020

Tips for Starting a Business During a Recession

Start a business during a recession? Who does that? Well, many successful household name companies have. Uber and Airbnb started during the 2009 recession. Microsoft started during the 1975 recession.

Starting a business during a recession doesn’t mean you throw the usual playbook out the window. But there are some tips you can capitalize on during a recession to help you find opportunities, secure funding, reduce overhead costs, and take advantage of low competition and high unemployment numbers.

Seize New Opportunities

Every successful business exists to meet customer needs. Every recession provides opportunities due to businesses shutting down and leaving a void. And not surprisingly, repair businesses tend to do well—auto repair, shoe repair, garment repair—as consumers spend their money fixing items rather than buying new.

But each recession also creates unique opportunities based on its root cause. As John Dearie, president and founder of the Center for American Entrepreneurship, said, “The unique nature of this recession seems to have opened a gaping hole that an enterprising entrepreneur could seek to fill.”

What are some of those gaping holes?

When looking for your business opportunity, keep in mind that your value proposition can change over time. For example, during a recession, customers may buy your product for cost savings. As the economy improves, that same product can become a revenue generator instead.

Seek Alternative Funding

During a recession, interest rates may be low, which makes small business loans an attractive option. However, securing a loan might be challenging as banks reduce their risk and tighten their lending rules. So be prepared to seek alternative funding sources.

Check to see if your state offers self-employment assistance (SEA). SEA is similar to unemployment insurance, but rather than requiring you to look for a new job, it pays you while you establish your business.

Research new funding sources available due to the recession. For example, during the coronavirus pandemic, there were funds targeted toward female business owners.

Consider family and friends as potential investors. During an economic downturn, investing in your business may be more attractive than investing in the stock market or real estate.

See if any competitors are bowing out of the market. If they are, you can consider purchasing their existing business for a steal and put your stamp on it.

Keep Overhead Low

Keeping overhead low is great advice for all startups, but during a recession, it can be even easier to do so.

Look for discounted equipment from businesses that are shutting down. Auctions may be a great source as well.

If it fits your business model, implement remote teams to reduce the need for physical office space. The pandemic proved the viability of remote work and effective remote team communication for many businesses.

Plan on negotiating prices with suppliers. During a recession, other companies also want business, so suppliers are apt to give better credit terms. They get additional business and you save costs on supplies—a win-win.

If you are unemployed, don’t overlook the opportunity cost of your time. Leaving a steady job to start a business has a higher opportunity cost than taking the chance when no one is paying you for your time.

Play the Marketing Game

Marketing and advertising aren’t fruitless during a recession.

Research by Kellogg Insight demonstrated the importance of the initial customer base on long-term revenue. Companies started during a recession tend to have a smaller customer base initially—everyone has a tight hold on their wallets—which translates to fewer customers and less revenue for several years post-recession. Plan on marketing and advertising during the recession to maximize your initial customer base and early adopters to prime your long-term revenue.

The good news is your startup story may be made for PR. Starting a business during a recession isn’t the norm. Or maybe your business is filling a critical need. Media and social media are looking for feel-good stories to cover. Why not pitch them your story?

Embrace the Lack of Competition

A lack of competition—due to competitors closing down or existing businesses reducing spending during an economic downturn—can work to your advantage.

The founders of Otka refer to the lack of competition as an innovation vacuum. They started their business—moving identity management to the cloud—during the 2009 recession. While other businesses hunkered down and waited for the economy to rebound, they spent time innovating a new product and were able to create an entirely new market without battling competition.

Lack of competition may also be a great time to focus on delivering a minimally viable product (MVP). An MVP is a product with the least amount of features needed to attract early-adopters and validate a product. Less competition gives you a market to test early versions of your product and gauge customer needs.

Or consider trying out your business. Similar to the concept of an MVP, Small Biz Survival suggests hosting or participating in pop-up events to see how customers respond to your idea before you go all-in and write your business plan.

Create the Dream Team

High unemployment rates during a recession mean high-quality employees may be looking for work. Snag the brainpower available on the open market and put it to work for your business. These skilled workers may take a lower pay rate in exchange for benefits and non-monetary compensation.

And those same employees may stick around once the economy recovers. Research shows that teams that go through tough times together build a stronger bond. So being scrappy together by building a business during a recession may reduce employee turnover during strong economic times.

Small businesses are the backbone of America. And starting one during a recession not only helps the economy but may even give you a boost over those who choose to wait for an economic rebound. Follow some of these tips to help jumpstart your dream.

About the author

Katherine O'Malley
Katherine O'Malley
Katherine O'Malley is a contributor to the Lendio blog. A technology geek at heart, she splits her time between traveling, freelance writing, database administration work, and implementing SEO on her travel blog. In her free time, she loves to research the challenges small-to-midsize tourist suppliers face and find ways that technology can help them out.

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