Starting a business is challenging at the best of times, but the thought of beginning one during an economic downturn is even more daunting.
While a recession is most commonly associated with companies going into administration or struggling to make ends meet, it is still possible for enterprises to excel during such periods. As such, it isn’t always a bad idea to start your business during such a time.
If you are launching a start-up, it is crucial to do it in the right way to prevent it from becoming one of the casualties of the economy. This means having a sound idea, utilising financial support and laying strong foundations for the future of your company.
In this blog, we have put together our top tips for starting a business in a recession so that you can enjoy success despite the uncertainty.
- Have a valuable idea
- Plan carefully
- Take advantage of low-interest loans and investors
- Add value to the economy
- Get appropriate advice
Have a valuable idea
With any start-up, you need to have a good idea to achieve victory. In a recession, it becomes even more fundamental to get the idea behind your business right.
When there is economic uncertainty, you will find that the needs and the financial situations of your customers change. Many will reduce their spending and turn away from frivolous purchases, instead focusing on necessities and being generally more selective with how they dispose of their income.
In order to make sure your business generates sufficient sales to cover its costs, it is therefore essential to consider what your customers’ new priorities are and how you can add value. When consumer confidence is down, the purchases they see as valuable are likely to be related to one of two areas.
Firstly, customers will make purchases they see as necessary. This includes daily needs such as food shopping, purchasing household goods and services like energy supply, internet, insurance and so on. However, it also consists of those purchases they see as directly addressing their pain-points. For example, they may seek financial advice or other investment that they believe will ease their situation and feel justified in spending money accordingly.
Alternatively, if a product or service significantly compels them, they will want to buy it despite their economic uncertainty. In times of hardship, consumers are still looking for purchases that offer them that feel-good factor – so, if you are able to provide this, it can lead to interest and sales. Companies that utilise creative or innovation solutions tend to do this well by filling gaps in the market and offering ‘fresh’ products that draw in consumers.
This is similarly true if you sell business to business, rather than to consumers. When plotting out your offering, it is worth determining if your idea falls into either of the two buckets described above. If it does, you can be more confident of drumming up demand for your business and setting off on the right foot.
Plan carefully
Careful planning should underpin your business at every stage. In a recession, when the odds are arguably already against you, it is even more vital to have a robust plan in place.
Consider the operating model behind your business idea and how you can recession-proof it. For example, you may wish to utilise low-cost options wherever possible to bring your overheads down or hold off on introducing specific processes or services into your operations until your finances are stable.
You should also be mindful of any suppliers or partners you choose to work with, as they could be going through their own difficulties which have a knock-on effect on your operations. There is, however, a chance this could work in your favour. With many suppliers likely seeing reduced sales, it may make them more eager to work with you and give you a more extensive range of potential partners. Some providers will even offer incentives in an attempt to drum up demand, so seek ways to take advantage of this.
Financial forecasts will become particularly significant during economic declines. As part of your forecasting, you need to determine the costs of setting up your business and any regular outgoing expenses. You will also need to analyse at what point you will breakeven and how your sales and profit will gradually increase. It is important to apply even more scrutiny to the numbers so you can account for any limits imposed by the recession and be confident that your business will be able to survive.
Take advantage of low-interest loans and investors
One advantage of beginning a company during a recession is that your set-up costs may actually be lower.
The Bank of England will often lower interest rates to counteract falling supply and demand, meaning that borrowers benefit from less sizeable balances to clear. This will usually impact commercial loans from high street banks as well as start up loans and alternative lenders, who will all aim to be competitive to increase demand. So, be sure to shop around different providers to find the best option for you and benefit from lower repayments.
The downside is that many lenders will become more risk-averse during a recession, as the chances of any firm they loan to folding and not being able to repay the balance are increased. As such, your business plan and forecasts will need to be bulletproof and convince a lender of your value.
If you are looking for an alternative way to secure funding, equity investment may be an ideal route. Despite the climate, some investors will still seek opportunities to invest in enterprises and enhance their wealth, providing you can prove that they will receive good returns on their money. Investors tend to be less risk-averse, such as angel investors, which could make them more welcoming of your pitch. As a result, you may be able to secure the finance you need to run your company without having to rely on a commercial loan.
Add value to the economy
When you create a new enterprise amid a recession, it is essential to find ways to add value to the economy. Doing so can boost your own business as well as the wider world.
An example of this is creating jobs through the launch of your company. With many workers made redundant as a result of other employers scaling back, new vacancies will be welcomed in the economy, and your enterprise will take an almost heroic position when offering them. In combination, you have a broad pool of people looking for jobs, which will make for easier recruitment and access to a wide range of skillsets.
Other ways you will contribute to the economy include providing custom to your suppliers and partner companies, paying tax and bringing growth to local communities and industries.
By adding this value, you will receive positive sentiment from customers which can lead to the establishment of a loyal customer base, better engagement and word-of-mouth marketing. You may also garner positive publicity in the press, which can increase awareness of your brand. These effects will continue even after the economy has settled, giving you long-term benefits and creating an excellent basis for the future of your firm.
Get appropriate advice
While on the surface, starting a business during a recession seems risky, there are reasons to do so, such as lower interest rates and a vast skills market to recruit from. A company that sets up in the midst of hardship and survives will also be well-positioned to overcome any future challenges that come its way.
If you are looking to make your entrepreneurial idea a reality, it is crucial to utilise support to make sure you are able to achieve success. The right guidance will help you to set up your company, plot out your finances and discover how to bring value to your customer base – which is key to ensuring success even in the face of financial instability.
At Pegasus Funding, we have experience of working with start-ups and growing SMEs to turn their aspirations into reality. With expertise across many business sectors, we can advise you of the appropriate financial support for your unique needs, as well as how you may be able to counterbalance the effects of a recession on your operations.