Without a doubt, an economic recession is a major challenge for businesses. It is a period when economic activity slows—as defined by at least two consecutive quarters of negative growth of Gross Domestic Product.
While others seek to avoid risk when the economy slows, entrepreneurial-minded individuals may consider starting a business to take advantage of opportunities for startups that are unique to this period.
For small businesses and startups to survive a recession, cash is king. It is liquidity that gets things done—and without it, operations come to a halt— opportunities are lost —leading some small businesses to shutter their doors permanently.
How entrepreneurs manage their finances, budget their cash reserves, and choose when and where they make expenditures will influence not just weathering a tough economy, but also positioning their venture for longer-term success.
While the challenge of surviving a weak economy is daunting for startups and small businesses, for some entrepreneurs a recession may actually present an opportunity.
First, if an individual has been considering doing a startup, in some instances a recession may be a good time to begin. They can take the first of many steps to start a business that requires their time, while not having to draw down on much cash.
If they are unemployed, their opportunity cost is now zero, because they do not have income. Those receiving unemployment insurance may have the added benefit of covering their living expenses while they are starting up their business.
Starting a business takes planning and doing fundamental organizing over a period of months—moving a startup from a business idea to concrete action. Those activities well employ a founder’s time during a good portion of a recession that historically averages eleven months and when consumer demand declines.
The founder is taking the steps that best position their startup so they may hit the ground running when the business cycle picks up. They arrived at that point by having taken risk at a time when others typically have stepped back.
Second, a recession often shakes out competitors—leaving the more successful companies in place for the recovery. As a result in certain circumstances, the entrepreneur is presented with a range of opportunities brought about by a recession:
1) expanding their customer base in their target market when their competition is forced to leave the arena,
2) purchasing expensive equipment that comes up for auction that enhances their own infrastructure at sometimes pennies on the dollar and
3) lowering startup costs by sourcing cheaper alternatives and negotiating better pricing from their suppliers.
A funded entrepreneur launching a startup may find a recession to be a more advantageous time if they working in the tech industry and building a new product. That is because vendors are more negotiable on price and more responsive to deadlines. This is a period when suppliers are seeking to replace accounts that have fallen away during a bad economy.
Third, many small business owners run their businesses inefficiently—often carrying people on the payroll who are not truly productive, and often not taking advice about their small business to help it grow. A recession sometimes forces an owner’s hand to make cuts including layoffs that are best for the business in the long run, but still hard for them to do.
Fourth, unemployment spikes during a recession, and surprisingly great talent becomes available for hire or to join a startup that they otherwise would not consider. Not only can an enterprising entrepreneur lure that talent in, but often they are able to negotiate a lower salary or compensation package because others are not hiring.
While these upside circumstances may not be available to most small businesses that are struggling simply to survive a challenging economy, for others these are substantive business opportunities. Years later some entrepreneurs may look back on poor economic times, not as a period of total struggle to survive, but as a fortunate period when they made a pivotal decision that placed their venture in an advantageous position.
For those considering a startup, a recession is a good learning period to evaluate various kinds of businesses. They can learn whether or not if their business model is recession-resistant or recession-proof. Examples of the latter are businesses providing essential services and products such as those in the healthcare industry, grocery stores, beauty products, and childcare providers, utility services, amongst others. These companies typically experience constant demand despite an economic slump and poor market conditions
The entrepreneurs who seized opportunities during tough times and took on greater risks when others did not, later achieve long-term success and prosperity.
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Jeanne is the Publisher of American Entrepreneurship Today, a website dedicated to helping entrepreneurs and small business owners succeed. She consults via AEP LLC., as a growth strategist, steering entrepreneurs through startup pitfalls, while identifying resources and opportunities that catalyze a venture to a greater level of success. Copyright AEP LLC 2019-2020
