06 Apr Reasons for starting a Business during a Recession
Recessions tend to be thought of as rare events that occur once a generation. In reality, the UK has gone through a recession almost once a decade since World War I, and the COVID-induced 2021 / 2022 recession is just the latest in that line. Suffice it to say we know how to navigate these tricky financial times. One lesson we have learned that may surprise many is that the midst of a recession is a good time to start a business.
The advantages of starting a business during a recession
The bleak and uncertain economic outlook during these tough times may not seem like the obvious setting for success, but startups are inherently agile and use that agility to take advantage of the weakened state of the economy. By necessity, startups tend to run lean, so they are already poised to survive and thrive during the belt-tightening times that recessions bring. Here are some of the reasons to start a business during a recession.
People are looking to save money
One of the problems with becoming a large, established organisation is that it is difficult to shift gears quickly. A supermarket chain can track economic trends and make changes based on what those trends show, but they can’t cut their prices immediately. At least not without causing damage to the business in the long run. A savvy entrepreneur can undercut the established competition because their negotiation is fresh and not tied to existing contracts.
People will be looking for work
It’s an unfortunate reality of any recession—and the pandemic recession is no different—that many people will find themselves unemployed as a result of the decline in economic growth. Starting your business as the UK enters recession doesn’t just give you the freedom of starting a business from home; it also gives you a wealth of talent to hire from that would otherwise have been tied up with larger competitors. It may feel a little grim to be taking advantage of a high unemployment rate, but remember, you will be giving work to people who need a job.
Interest rates will be lower
The COVID-19 recession, the Great Recession that kicked off in December 2007, and most other recessions in history have seen central banks lower interest rates in a bid to limit the damage caused by the diminished economic prospects. For a new business, this means cheaper credit, which in turn means a greater ability to buy real estate, get business loans, and generally find the silver lining of the significant decline in economic growth.
There will be less competition
Another unfortunate reality of recession is companies going out of business or being severely hamstrung by the shrinking economy. This can be a positive for a new business, however. As industrial production slows and gross domestic product GDP decreases, a new business can step into that void.
Smart investors will want to invest
There is no getting around the fact that new businesses typically need capital to get off the ground. Fortunately, recessions are not just a good time to start a business; they are also good times to invest in new businesses. Angel investors, in particular, will often look to move their money out of the stock market during these times and will be on the lookout for promising new business opportunities. This can be a great way to keep the money supply flowing when first getting started.
Your startup will be forced to develop good habits
One of the biggest traps of their own making that companies fall into is developing bad habits. This is especially the case for companies that form during times of economic recovery when things are looking up. These businesses suffer when the GDP drops a percentage point or two. Businesses starting during a recession will be forced to run lean and can take those good habits into the better times of economic growth.
Big competition will be vulnerable
It can be hard to get off the ground as a new business, mostly due to the fierce competition faced by larger, established businesses. However, their activity will be severely diminished during times of recession, giving new businesses a much better chance to gain a foothold in the market. This is not to say that a new business will have free reign over its chosen niche, but things will certainly be easier going than during times of economic growth.
While this post doesn’t cover the disadvantages of starting a business during a recession, they do exist. No new venture is without risk, and there is no such thing as a fool-proof business idea. That being said, there are many advantages to starting a business during an economic recession. It can be worth looking out for indicators from the Conference Board and keeping an eye on the Business Cycle Dating Committee to make an informed decision on when the best time to start your business might be. You don’t need to wait for the Federal Reserve to make it official.
Even now, in 2022, there are thriving businesses that started up a mere 18 months ago, when things looked as bleak as they ever had for our economy. April 2020 may be behind us, but if history is any guide, there will be other recessions bringing more opportunities.