When economic times are tough, conventional wisdom is to batten down the hatches and put start-up plans on hold while you weather the financial storm. Yet research shows that launching a small business when the economy is on the ropes may be a good idea, with start-ups better able to exploit gaps in the market compared to existing companies.
The Covid-19 pandemic has been seismic in terms of the number of businesses it’s forced to close. While the economic fallout may be felt for years, green shoots are appearing as new start-ups emerge that could help accelerate economic recovery.
Read our guide to starting a business during coronavirus for advice and support.
According to data from Companies House, new businesses are launching at a faster rate than ever recorded previously. The number of new companies incorporated in the third quarter of 2020 increased by nearly one third compared to the same period in 2019. The result was an additional 51,269 new businesses started in three months – the largest increase since records began.
Want to learn more about how to manage financial risk when starting a business?
Why launch a business in a recession?
Contrary to popular belief, launching a business isn’t restricted to periods when the economy is booming. Some of the world’s largest and most well-known businesses started during recessions, including global giants such as Microsoft and Disney, as well as recent companies such as Uber and Airbnb.
The UK has seen companies such as JD Sports, Wilko, Pure Gym and Sipsmith launch and thrive during economic uncertainty.
While a depressed economy is far from ideal, start-ups can be well-placed to quickly move on emerging gaps in the market or shifting consumer spending trends, laying the foundation for growth as the economy improves.
There’s no substitute for rigorous business planning when starting up. But if you’re concerned about the viability of launching your business during a recession, here are 10 reasons why starting up may actually be a good idea.
10 reasons to start a business in a recession
1. Established businesses may be struggling
Start-ups can be the business equivalent of mammals facing established company dinosaurs that are slow to evolve in the face of a challenging environment. Many existing companies have plans that assume the economy will continue to perform well, with costs committed to overheads such as retail premises and employees. Big businesses may have cash reserves, but they can be more cautious and slower to act, leaving them vulnerable to sudden changes in customer spending.
Start-ups aren’t lumbered with existing processes and extensive overheads. Instead, new businesses can operate leanly from launch, adopting new and flexible ways of working. Start-ups can use outsourcing and new technologies to deliver products and services that are different and offer more value to customers at a lower price than existing companies.
2. Interest rates may be lower
If you’re looking to borrow money to launch your business, a struggling economy can mean lower interest rates. That may be bad news for established businesses with cash reserves, but it can be good news for start-ups looking to secure funding with a low interest rate. This means it could cost less to repay a loan. Credit facilities – from credit cards to credit lines with suppliers – can also be cheaper.
3. Increased support for start-ups
Start-ups are often seen as the key to shifting a faltering economy into a higher gear. That can result in numerous schemes, grants and incentives designed to support the early growth of small businesses. Besides national grant schemes such as Innovate UK and the National Lottery Heritage Fund, it’s worth exploring tax and benefit schemes such as the Government’s New Enterprise Allowance. This pays an allowance of £1,274 over 26 weeks for people on benefits such as Universal Credit to start a business. The Government has a dedicated finance and business support site that lists the different funding sources and grants available.
4. Securing investment may be easier
Raising money to invest in your start-up idea can be easier during financially challenging times. If stock markets are in freefall and interest rates low, investors often look for other ways to invest their money and may be more interested in funding your venture.
Find out more in our guide to business funding
5. Your business can recruit better staff
Job redundancies are a sad reality of an economic downturn as businesses look to cut costs. This can see an influx of talented, experienced professionals into the job market, all chasing fewer job vacancies. Your start-up could be more attractive to skilled jobseekers during a financial downturn. Salaries also tend to be lower, allowing your business to keep staff overheads down while attracting higher-calibre employees.
6. There is less competition
Many people become risk-averse during economic downturns, battening down the hatches and showing less willingness to risk savings in starting a business. This clears the path for your start-up, as there may be fewer competitors entering the market. Less competition may make it easier for your start-up to get a foothold and quickly grow market share.
7. You can negotiate better deals with suppliers
When consumer spending dries up and businesses fold, suppliers are often hit hard. With stock to be shifted, start-ups can be in a stronger negotiating position with suppliers. It may be easier to get favourable credit terms and arrange more significant discounts for bulk purchases as suppliers look to protect their cash flow and move stock on. It’s worth a call with existing suppliers too, to see if you can renegotiate a deal.
8. Materials and overheads can be cheaper
Economic downturns can see prices slashed and bargains to be had. This is especially true of overheads, such as retail, warehouse or office space, when empty premises can be snapped up for less. Costs can fall across the board, such as the costs of materials used to create products through to expenses such as office supplies, telephony and IT equipment.
9. Your business is more agile
Tough times can result in start-ups that are leaner, more agile and more willing to innovate. This can be an excellent blueprint for your business as it grows, resulting in a company culture that can aid sustained growth over the longer term. Regularly reviewing financial forecasts, keeping a close eye on expenses, and being willing to change course are great habits to get into.
10. People want cost-effective solutions
The economy affects customer spending. Customers are increasingly looking for good-value products and services and cheaper solutions as they cut back. With lower overheads, start-ups can be well-placed to offer lower-cost products and services, winning customers from established businesses. New businesses can also spot solutions to customer needs and problems, bringing new products and services to market that better meet shifting consumer appetites.
Thinking of starting a business? Check out our free online courses in partnership with The Open University on being an entrepreneur. Our free Learn with Start Up Loans courses include:
- Entrepreneurship – from ideas to reality
- First steps in innovation and entrepreneurship
- Entrepreneurial behaviour
- Entrepreneurial impressions – reflection
Plus free courses on finance and accounting, marketing, project management, management and leadership.
Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.