Home Small Business Should You Start a Business in Recession?

Should You Start a Business in Recession?

697
16

Opening a new business, even when the economy is ‘booming’ already has many challenges, but to start a business in recession can seem outright crazy, since it is usually more difficult to attain success this way.

While getting your small business up and running during the ‘bad years’ might seem like a bad idea, there are still benefits to this situation and ways you can make it work for you.

But, first, my story in short:

Back in 2008 the economy was clearly booming in my country as well. We had a lot of work opportunities, we got loans for various items we wanted to purchase (some colleagues of mine got mortgages, some – self included – got car loans etc.), the future seemed very bright.

Sure, there were some ‘crazy‘ people warning us about a huge recession coming our way, but who had the time and willingness to listen for this, when reality looked golden?

And then it hit us.

After a year and a bit since getting my car loan I was jobless. Let me rephrase: WE were jobless.

The entire team in our radio studio lost their jobs and the reality in the business was bleak. The biggest salary we’d secure was way smaller than our last one, so small it couldn’t pay our debt.

My web design business had been sitting on the back-burner for years, but it was now the time to make it or .. well, make it, no other option presented itself, one that would allow me to keep my car, business and survive each month.

Getting my small home based business up and running was very difficult. You can read my entire story here, fortunately it’s a happy-ending one.

This got me thinking about how difficult it is to create a successful business during recession years and prompted me to try list few pros and cons for doing this:

Top reasons not to start a business in recession

People don’t have money to buy your stuff

I am a web designer, so, for many people (except for businesses), getting a professionally designed web site is a luxury. Sure, someone who earns a good wage will invest in his own web site, but, during recession, people have to target their money to more important stuff: say groceries, bills, medical insurance.

Your potential clients’ money issues mean small prices for a business or nothing, if they really cannot afford your products/services at all.

During 2009 my web design rates were so small, I could barely pay my bills on time. I did have to work for about 14 hours/day to keep myself ‘afloat’.

While my rates are still VERY affordable, today I can earn a living and also work fewer hours a day, getting the chance to spend more time with my daughter.

So, if you plan on opening a business during recession, consider this problem: your potential clients are struggling with money, so you’ll probably sell less and/or at smaller prices than during the years with a good economy.

Bigger taxes in some countries

When Romania was hit by recession, our ‘amazing‘ Government thought about getting more money from all the ‘ailing‘ businesses by increasing the taxes.

One in particular killed tens of thousands of small businesses: you’d pay a fixed tax even if you earned little or no money on your business. If I am correct, the tax was about 500 Euro paid annually. You’d think it’s nothing, but wages here are usually about 300 Euro and many small companies were barely making it: the owners earned enough to put bread on the table and pay the regular taxes.

Let’s not forget that taxation in Romania is already huge (we pay a lot of health / income / pension taxes already, both as companies and employees). Said tax came ON TOP of everything else.

As you can imagine, a lot of the small businesses were closed down, even if it meant paying about 1000 Euro to do this, since the owners had no chance to still make it and pay the new tax.

In many countries, during recession, the Governments ­will think of new taxes for the businesses that are still active, so that they can still collect as much money as possible. So, it’s possible to pay bigger / more taxes in recession, which will make starting your own business even more challenging.

Cashflow problems can destroy your business

I know many small businesses owners that closed down ‘shop’ since their clients missed payments and their cashflow was a mess. Bills, taxes, wages have to be paid and you need to have the money to do this.

If you have 1-2 bad paying clients, you can still make it as a business, but, during recession, there can be many clients who cannot pay on time. And this can cause your business to tank, unless you create some strong payment terms and are making sure invoices are getting paid.

It’s almost impossible to get a good financing deal

Business loans (just like any other types of loans) have drastic conditions during recession. I recall the year 2008 in our country, when almost anyone would ‘qualify’ for a loan.

Fast-forward one year after and the conditions were so strict, that we used to joke: ‘hey, if I can qualify, I’d have so much money I’d not need the loan’.

In conclusion: if you are after getting some financing for your small business, prepare for some very difficult terms.

Low morale

I HAD to start my business in 2009, there was nothing else I could do.

Even if it was my only chance to pay off my debt, cover my taxes and earn enough to live, my morale was low. Many web design studios in my city were closing down and we were talking some pretty big players. And I was opening a small web design business. Yeah, sure.

Seeing so many businesses going bankrupt during downturn won’t lift your spirits too much, but, even when others are failing, there is still room for success.

Top reasons you should start a business in recession

Incredibly as it might seem, starting your own business in such difficult times is also a good idea. Here are few advantages:

Your small overhead is an advantage, during recession

Some of my bigger competition closed shops because they were already too big. Huge overhead and slow paying customers –  the recipe for disaster. I was working from home, so my costs were minimal.

I was also working alone, so, even if I was making little money, compared to what these companies used to earn, my income was still enough for me to stay afloat and slowly develop.

The chance to get some great prices for the items you need for your business

Just as you are probably forced to drop prices to get customers, other companies go through the same process. This means it’s easier to get some excellent prices for what your business needs. Not to mention that, as other businesses are closing down, there are also some great deals for pre-owned furniture or appliances (if you are not interested in only buying new).

You can get good staff at lower wages

OK, this is not ‘cool‘ to say, but recession usually means there are many excellent potential employees with reasonable money expectations. During the ‘boom’ years, companies had to fight to hire staff and this meant having to sometimes pay a lot of money to inexperienced employees, just because there were too few to choose from in the first place.

A tight budget will keep you from overspending

When businessmen are optimistic, they tend to overspend. If you are starting your business during recession, chances are you’ll be pretty careful with each and every penny you spend. Keeping your overhead small is a great idea anyway.

Businesses exiting the market means more opportunities for you

While knowing that similar businesses are not making it is sad, this also presents a great opportunity for you to fill in the clients’ demand. When I started out, other similar businesses were closing down, but their clients still needed web design and internet marketing services. And there I was to make it happen for them.

You can learn from your competitors’ mistakes

During downturn, many businesses face hard times and this is a great lesson for a new businessmen. Back in 2009 I understood that the biggest mistake I could do back then would be to spend too much money, even after a promising start. Even now, after 6 years, I still keep my overhead to a minimum. This way, even few slower months won’t bankrupt my small business.

What other pros and cons can you find for starting a business during recession? What’s your own story?

16 COMMENTS

  1. I still cannot muster the courage to create a business, even if the times are already better. Must have been really hard back in 2009

  2. You raise some very good points. I think it is also important to really consider what type of business you will start up if you are faced with the opposition of a recession. For example, if the economy was booming you would be much more willing and likely to invest in a physical location and store selling a product. I think that in the case of a recession, you should really look at something with a smaller risk involved, in terms of investment, such as having an online business which will cost less than a physical location and also looking at selling a service which once again can be of low cost to the entrepreneur.

    • Absolutely. During recession, the best call is to have a small business with a puny overhead, otherwise it’s harder to make it work. not impossible, but you do need an excellent business plan, some serious savings and a bit of luck. I was lucky to know web design and this allowed me to work from home.

      I do need to have a good laptop to work on, but it’s the biggest expense after all. We have the regular household expenses and taxes, but no rent, wages etc.
      Ramona recently posted…The 11 Top Benefits of Having a Company BlogMy Profile

  3. Despite the recession we all fear so much, I have seen many new businesses opening up lately: cafe’s, small restaurants, a lot of ice cream shops and so on. And they seem to be doing quite well! I think it’s all about knowing what people need, people will always need to eat, they will always stop for an ice cream when it’s 100 degrees outside, so, recession or not, some new businesses will always do well if they know how to cater to client’s needs.

    • Well I would think that there is a little bit of the “buy low sell high” thing going on here. They say that when the market is down is the best time to buy, because when things spring back up you will be right there to benefit from it. Of course there is much more to it than this, but it is certainly interesting to think about.

  4. I think, if you have a good idea for a business and the resources to start, then you should just do it, recession or not! There were pros and cons even before the recession started, businesses failed long before the economic crisis hit everyone.

  5. I see the recession as a double edge sword. It is bad for people to get laid off. It is good as it gets rid of bad businesses. Businesses that can survive a recession may have something someone else could learn a thing or two about. It also means others have an opportunity to shine while competitors sink.

    • While I partially agree with you, I have to say, unfortunately, many good businesses are also failing because of the recession. Here, in Italy, we have a lot of handicraft businesses that have closed down. Not because people can’t appreciate a uniquely handcrafted item, but because people prefer to pay a lot less for something that isn’t handmade, but affordable. There are fewer and fewer who can afford supporting the art of craftsmanship, and yet many of these businesses are like our country’s signature 🙁

  6. Lately I’ve been toying with this idea myself, and ever since I saw your article on how to make money with preserves, I keep thinking “what if”.

    If I actually go through with it, I would be cooking “the merchandise” in my own home, so minimal costs! I’d open it with a good friend of mine, as partners, so no staff to pay wages to! The “raw materials” – free! (my friend has her own garden). However, while it all sound so perfect, all the cons you have listed here are literally standing in our way. So, so far, I have an idea that I’m too afraid to materialize, because I need more info on what a small home based business actually implies.

    • Well I hope that the whole being afraid to materialize is really not keeping you from pursuing it, because even though it is certainly good to be careful and conservative, you still want to be able to strive for that thing and want to do it. I hope that you find your answer, and I think it sounds like a nice little business, and like you said, minimal costs.

  7. Is freelancing considered a business? The more I read about it, the more I’m interested in pursuing it as a career of sorts. And since the main argument here is the recession as the enemy, when it comes to freelancing I don’t see that many risks you’d have to take. You can look for “customers” all over the world, so that’s a plus, you can start as small as you want, there’s no need to invest a ton of money into it to start, ecc., ecc., ecc.

  8. At first, I was afraid of the idea of starting my own business, because I thought it was something so very complicated only a “genius” could become a business owner. But as it turns out, I’m more and more tempted to make the big step myself! I’ve been bouncing ideas off of my brother’s head for some time now and, like you mentioned here, there are lots of pros to doing it! I only hope our future business will need minimal investment, otherwise we’re screwed 😀

LEAVE A REPLY

Please enter your comment!
Please enter your name here

*

CommentLuv badge