Because recessions are periods of economic decline, they can make a potential entrepreneur pause. They may then reconsider, wondering if it is wise to start anything new during this time.
Although there have been many great companies that started during a recession, it isn’t an easy thing to do. There are indeed many disadvantages to starting a business during a recession. However, by understanding what’s happening in the economy during this time, entrepreneurs can increase their chances of succeeding in a new venture.
Should you start a business during a recession? Only you and your co-founders can make that decision. But, before you make that decision, there are some things to consider. So, let’s examine how a recession could impact your future business.
What Happens During a Recession?
We need to understand what a recession is. Simply put, a recession is an extended time of economic decline. Economists may explain this in different ways. However, the way economists explain a recession isn’t so important to the average consumer because many people will often feel the effects of a recession before the news or even economists declare that a recession has arrived. People will have already started feeling the pain. Here’s what will happen:
- During a recession, people will lose their jobs.
- Companies may be able to predict the coming recession, which will cause them to pull back on their spending. As a result, they will stop hiring and start layoffs.
- Companies that haven’t started cutting jobs may cut bonuses, raises, or other employee perks. In addition, the employees who are still getting raises may get smaller raises than they did before.
- When employed workers aren’t getting raises, they have less money to pay for everyday purchases. This includes everything from groceries to electronics to clothing.
As you can see, a recession is a vicious circle. People will start to look for ways to make it through until brighter times come; this isn’t to say that a new business can’t survive during this time. Instead, people still spend money during a recession, and some companies do quite well. Is your business idea on this list? Then, check out 13 Recession-Proof Businesses That Thrive in a Down Economy.
Understanding how a recession changes the overall economy is important, but how would a recession potentially impact your new business? Think about how a recession changes consumer behavior. During a recession, everyone is looking for a deal. They have no choice because money is tight. In addition, some people have lost their jobs, so living with less may be their only option.
Disadvantages of Starting a Business in a Recession
1. Finding Funding
Funding is an integral part of starting and operating a new business. Unfortunately, 82% of companies fail due to cash flow issues. That is because, during a recession, banks and other lenders tend to pull back on lending. This presents a challenge for new businesses relying on a loan or a line of credit to pay operating expenses.
New businesses will need to solve this problem by seeking alternative sources of funding to help cash flow. For example, if a business needs to produce more cash flow to keep the doors open, seeking funding from investors is one option. Another option is to raise capital through alternative methods such as crowdfunding or peer-to-peer lending.
2. Consumer Spending Changes
During a recession, consumer spending habits tend to change dramatically. Many consumers choose not to spend any disposable income they may have. Instead, they may decide to save that money or pay down their debt.
This can hurt any new business trying to grow its consumer base as well as its sales. There are, however, some industries that are affected the most by changes in consumer spending.
First, it may hurt the automotive industry – particularly new automotive sales. People who planned on buying a new car are now looking at used vehicles as an alternative. Or, they’ve decided to drive the car they already have a little longer.
Consumer spending habits also change when it comes to beauty and haircare products. More people either do things themselves or delay their appointments with professionals. As a result, both women and men will go longer between haircuts.
Any new business in the food or restaurant niche should also understand how consumers respond to a recession regarding food. For example, families that used to drive through a fast-food line several times a week begin to cut back; instead, they choose to cook at home to save money.
These changes do not necessarily mean that a new business in these spaces will not survive. However, increasing sales during a recession will be a little more difficult than it would be in a stable economic climate. Any entrepreneur starting a business during a recession should be aware of these challenges.
3. Limited Number of Products Sell Well
Another challenge that an entrepreneur will have starting a business during a recession is in choosing the products to sell. There are many products that sell well during a recession. However, what if the business you are starting does not sell any of those products?
For example, sales of affordable comfort food products spike during a recession. But what if the business you would like to start is a premium healthy snack bar? You will have a hard time finding your ideal customer since many people are opting for cheaper, sweet, and salty foods that are not necessarily healthy.
This is a huge disadvantage to a new business. The business owner who may have had a potential success on their hands must now find a way to navigate the current consumer demand.
4. Gaining Traction
One of the exciting and challenging aspects of starting a business is figuring out what works. In a normal economic environment, this involves taking risks, innovating, and pivoting the business model if necessary. However, during a recession, it isn’t always a good idea to take unnecessary risks.
Innovating your product or service is necessary. But, how that happens changes during a recession. Calculated risks shouldn’t be labor intensive, time-consuming or pose a high financial risk if not successful. These activities make it more difficult to gain traction for a new business.
There is Still Hope
Can you see some opportunities in the challenges above? If so, you’ve got the heart of an entrepreneur! But it’s vital to know some of the tough choices that business owners may face during a recession. Starting your business during this time is unique for a few reasons:
- Ambiguity: You can look at past recessions to guess how long this one will last. However, this isn’t a guarantee for how long the current one will continue.
- Cash Flow: The new days of any business are focused on staying viable. You’re gaining clients, making sales, and establishing processes to make your business successful. Whether you have investors or you’re bootstrapping your business, a recession can be a challenging time for anyone to maintain a healthy cash flow.
- Personnel Decisions: To keep your business afloat, you may need to cut staff or reduce their hours. Unfortunately, these are hard choices that impact people’s lives.
Getting Through a Recession
It’s best to begin a business with a clear head, especially during a recession. Of course, there are distinct disadvantages to starting a business during a recession. However, the creative entrepreneur may find that a recession might be a unique time to meet consumer needs and create a thriving business during these difficult times.