preparing to launch
9 Good Reasons to Start a Business in a Down Economy
What do the megacompanies Publix, Advance Auto Parts and HP (Hewlett-Packard) have in common? They were all founded in the 1930s during the Great Depression. As these companies illustrate, it’s possible to start a business in a down economy and go the distance.
“A down economy can be a great time to start your own company,” says Raviraj Hegde, head of growth for Donorbox, an online donation platform. “Many businesses over the years have been started during depressed economies. Somehow, entrepreneurs make their companies grow, despite difficult economic conditions.”
Personal injury lawyer Justin Lovely, founder of The Lovely Law Firm, started his business in 2009 near the bottom of the Great Recession.
“If you have enough liquidity or cash flow to do so safely, a down economy can be a good time to start a business,” says Lovely. “Looking back on when we started the law firm in 2009, it was an ideal time. Many law firms failed in 2008 because they had overextended themselves. Yet people continued to require the assistance of lawyers. We were able to fill that gap.”
If you’re looking to start a business, here are several reasons why doing so in a down economy may be the ideal time to become your own boss.
1. Fewer competitors
The competition during a down economy is going to be a lot less stiff because many would-be entrepreneurs will be hesitant to take the risk. Instead, they’ll likely decide to wait out the financial storm until the economy improves. That means you won’t have to contend with as many competitors as you normally would during a strong economy.
“Less competition is probably the biggest reason that businesses can shoot for big success during a down economy,” says Hegde. “For instance, you might see an entire industry start to suffer in the depressed economy, but there will continue to be some demand for those services. As a result, whatever firms remain in the industry to fill that demand—even at a lower price point—can make a profit. A small startup company could remain extremely competitive in that kind of marketplace.”
2. Lower cost of goods, services, and equipment
The costs of getting a company going are generally lower during a down economy. For instance, you’ll likely be able to procure discounted products, services, and equipment for running your business. That will make operating your company less expensive, giving you a higher profit margin.
“Lower cost of goods and services can help you become profitable fairly quickly,” says Hegde. “Such savings will also allow you to hit a lower price point and capture customers who might not otherwise afford your products or services.”
“During an economic recession, you’ll have access to all kinds of resources,” adds Kevin Miller, founder and CEO of The Word Counter, an online writing tool. “Suppliers will have leftovers of raw materials in their warehouses and will be happy to sell them at discounted prices.”
3. Substantially reduced office lease costs
“When the economy is struggling is often an ideal time to land a lease on an office building at a friendly rate. Landlords are willing to cut deals and provide tenant improvement money just to get companies to sign leases and move in,” says Matthew Ross, co-founder and COO of The Slumber Yard, a mattress reviews and sleep website.
Ross started his company with a partner at the tail end of the Great Recession. “We found a landlord willing to sign a five-year lease, in order to get our company into the building. We got an incredible deal on monthly rent, plus he gave us $25,000 for tenant improvements.”
4. Ability to choose high-quality talent at lower rates
“A recession is a great time to find quality employees at lower than usual rates,” says Ross. “A lot of talented, hard-working people are laid off during downturns. Once that happens, they are willing to take pay cuts just to land a new job. New startups can take advantage of that.”
Ross’s first employee had recently been laid off when he came in for an interview. “He was willing to take a pay cut, so we were able to hire him,” says Ross. “He’s still a valuable employee and now acts as our production manager.”
Miller agrees. “Lots of high-tier professionals lose their jobs during an economic downturn. You will have access to talents who wouldn’t otherwise consider working for a startup in better economic conditions.”
5. Reduced advertising and marketing costs
Ad and marketing spend tend to be lower when the economy is depressed because many companies tighten their belts in this area when resources become more limited.
“While most companies are cutting back on their marketing spend, as a startup, you can pour money into advertising. The cost to run ads will be down, and there will be a less-saturated market. That will give your company more visibility,” says entrepreneur Ron Stefanski, owner of YourHouseNeedsThis.com. His website is dedicated to home improvement ideas.
6. Access to low-interest loans
One of the biggest benefits of starting a company during a time of economic stress is access to low-interest loans. The lower the current interest rate, the more money banks can loan to startups at low rates. Qualifying for loans during a down economy also tends to become easier.
“As long as you have a fairly decent score in the way of credit, you can often be approved for a good-sized low-interest loan,” says Hegde. “Banks like people with clear, well thought out plans, though. Make sure you are able to clearly explain to the bank's officials how you're going to make money with your business and pay the loan off.”
Many banks require that you present them with a formal business plan outlining your projected goals and mission for the company when applying for a business loan.
7. Opportunity to make your brand well known
As a newer company with a lot less infrastructure to support than older, established businesses, you’ll be better able to offer your goods and services at lower than average prices. During a depressed economy when customers greatly reduced their spending, they’ll be likely to try your products and services. This gives you a chance to become their go-to business. Once the economy improves, they’re likely to continue their patronage.
8. More time to plan and strategize
Starting a business involves a great deal of work. The necessary tasks that must be completed to start any company—including microbusinesses—will take up much of your time.
“There’s so much to do when setting up a business, and the tasks have short, medium and long-term benefits,” says Jason Lavis, managing director of Out of the Box Innovations, a digital marketing company.
“Oftentimes, once the economy gets better and business picks up, long-term goals for improving the company and ensuring its viability, including branding and digital infrastructure, are pushed to the side,” says Lavis. “The lull often common when starting a business in a down economy gives you a chance to make sure that your company foundations are strong and firmly in place.”
9. Your company can help stimulate economic recovery
Starting a business in a depressed economy may mean you become part of the solution. By opening a company and hiring employees and buying goods and services, you help stimulate the economy.
“Starting a business during a time of economic turmoil could give job seekers employment they might not otherwise get,” says Hegde. “In fact, there's probably some truth to the idea that startup companies play a big role in economic recovery during these times.”
Challenges of starting a business in a down economy
Starting a business when other companies are shutting their doors may be potentially successful, but it takes courage and resolve to carry off.
“The biggest challenge of starting a business in a down economy is that a lot of people will be making less money, which means there will be fewer people able to afford your product or service,” says Jeff Neal, project manager for the epoxy flooring contractor Capital Coating Inc. “You'll have fewer buyers and demand for your service, which will make it more difficult to acquire customers in the first place,” he says.
To help your company succeed despite a depressed economy, Hegde suggests ensuring that you enjoy your choice of career and business.
“Develop a concept you really love doing, because chances are the first few months are going to be pretty rough,” says Hegde. “If you’re doing something you love, you’ll have the energy and enthusiasm necessary to keep going and make the company successful, no matter what type of economy you find yourself in.”
If you decide to take the plunge and start your own business, despite the state of the economy, make sure to get help filing the necessary paperwork at Swyft Filings. We’ve got plenty of expert tips for starting a business the correct way.
Written by: Julie Bawden-Davis
Julie Bawden-Davis is a widely published journalist, blogger and author, who specializes in writing about business and personal finance. Julie’s articles have appeared in a wide variety of publications. She regularly writes for American Express Business Trends & Insights and Parade.com. For 10 years, Julie wrote weekly columns for the Los Angeles Times. When she’s not writing, you can find Julie in her Southern California garden.