Starting a small business is hard work in any environment, but it's even more challenging in a tough economy. This is partly because when credit markets are tight, it can be challenging to get financing. That's why small business owners must hone their business plans.
In other words, if you want a slice of the financing pie, you need to work your cash projections hard and know your bottom line down to the penny. It is important to know upfront how much money you need to put into the business, how much you need to charge to meet your operating costs, and what to do to turn a profit.
If you are thinking of becoming an entrepreneur, consider the following tips for successfully building your business in a challenging economy.
- You can successfully start a small business during times of economic uncertainty.
- Ask friends, other business owners, or professionals to review your business plan before you seek financing.
- Consider and develop your marketing strategy using search engine optimization and social media to drive potential customers to your business.
- Start small from hiring to inventory and then expand when things start to pick up.
- Some businesses thrive during times of economic uncertainty. If you’re considering starting a business, make sure you do your research before you spend your money.
Can You Be Successful?
A recession can be a very challenging period for both individuals and businesses. People lose their jobs and cut back spending, and cash reserves start to dwindle. Credit markets become tighter, and banks begin to increase their lending restrictions. This probably makes you wonder whether it even makes sense to consider starting a new enterprise and, if you think it does, how you do it?
Part of your success depends on the kind of business you intend to start, so choose a structure that can thrive when times are tough. Before we look at some of the steps, you’ll need to take to get your business off the ground, remember that you can find success—even at moderate levels—during turbulent economic times. Here are a few reasons why:
- You may find a lot less competition during this time. That’s because most people tend to start a business when the economy is flourishing. If you’re determined and focused, you may even be able to do it without having to share your profits with third parties.
- Customers you gain during this time are more likely to stick with you when the economy changes for the better. This is especially true if you’re able to offer them more affordable options than your competitors.
- Established businesses tend to curb or halt innovation during a downturn. You can use this time to come up with fresh ideas that may be missing in the market, giving you a better position when you open your real or virtual doors.
- You may find things are much cheaper, namely things that contribute to your overhead costs. Think of things such as your rent, furniture, and materials—all of which you may be able to get at a discount. Of course, in an economic downturn, like the one caused by the Covid-19 pandemic, finding things or even places to rent out are not necessarily cheaper. The pandemic-related supply-chain issues, an inflated real estate market, lockdown rules, and social distancing requirements made it very difficult for small business owners, especially those in the hospitality industry.
When you are looking for financing for your small business, don't overlook credit unions. Credit unions can offer personalized service and accessible small business loans. In addition, credit union loan officers usually provide personal attention, including advice and business strategies, to first-time small business owners.
1. Find Financing
Before applying for a loan, ask trusted friends or professional advisors to review your business plan to ensure you're not overlooking anything critical or making inaccurate assumptions. Often credit unions offer lower interest rates and fees than commercial banks, so don't narrow your search for financing down to only big banks.
You may consider asking the following sources:
- Friends who own their own business
- A loan officer at the bank where you do business
- Your local credit union where rates for business accounts may be friendlier than a commercial bank
- An accountant, but first get an estimate for reviewing your plan, so you aren't surprised by a high invoice
- Check out the Small Business Administration's SCORE program of free monthly mentoring sessions with retired professionals, designed specifically for people launching a business.
In addition to securing financing for your new enterprise, come up with a financial backup plan for your business and personal finances if you fail to hit your initial revenue projections. It is a good idea to build up your cash reserves to have enough to live off for six to 12 months. Make sure you budget carefully, so you can continue making your most crucial payments: rent/mortgage, insurance premiums, utility bills, and food. Finally, check your gut—and your bank balance—to make sure you're ready to start your new venture.
2. Do Smart Marketing
Starting a new business when the economy is taking a nose dive takes creativity and ingenuity. Marketing is vital to getting ahead of the game and your competitors. Take your business plan and flesh out the marketing components: What exactly are you going to sell? Who are your target customers? How will you price your products or services? What is your plan for promoting your business?
You stand a better chance of succeeding by thinking niche. Slice and dice your original customer base to come up with smaller segments so you can market more strategically. For example, if you offer a professional service geared to women, can you narrow it down to target women within a specific age range, career type, or geographic location?
Alternatively, think about ways to alter your products or services to broaden your business appeal and customer base. For example, if you opened a make-your-own-dinner company, could you also offer dinner delivery or premade/prepackaged dinners for customers who want grab-and-go?
Remember to keep a close eye on the competition. Do ongoing competitive analyses. Watch what other providers are doing and study the marketing techniques they’re using to build their businesses. Are they tweaking the product? Lowering the price? Using creative promotional tactics? You’ll need to know where your competitors are to differentiate yourself and gain market share.
3. Start Small… With a Plan to Expand
Manage your expectations and expenses by starting as “mom-and-pop” as possible, then plan to expand when your business takes off. Review your business plan and reconsider what you need to start. For example, could you open in a smaller and less expensive location? Or could you stay virtual by eschewing a physical office altogether?
After identifying the best, most affordable space for your business, think about your staffing needs. Before hiring full-time employees, think about filling positions with independent contractors, temporary workers, or part-time staff. If you’re opening a business in an area that has seen local businesses fold, you may be able to pick up some excellent talent for less compensation than in a favorable market.
Be realistic about which employee benefits you can offer and shop competitively for the best prices. It may be better for your employees to provide fewer benefits upfront and add them as your profits increase rather than taking benefits away if you can't afford to maintain them.
4. Use Technology to Your Advantage
First nearly, all small businesses need to use social media marketing on Facebook, Instagram, LinkedIn, and other social media sites to reach a broad audience in cyberspace. In addition, learning how to use search engine optimization to reach potential customers via Google is a wise idea. Digital marketing on social media creates a buzz of awareness around your brand, drives sales, and can be an affordable way to market your new business.
Technology can provide you with numerous ways to save money and increase profits. Using technology will bring customers to your brick-and-mortar or digital door.
- Expand your market by selling online through multiple channels.
- Do email marketing instead of more expensive electronic or print advertising.
- Use websites to get ideas from fellow entrepreneurs and successful business leaders, such as Entrepreneur.com.
- Optimize your website for search engines to keep your site coming up at the top of your customers’ searches.
- Produce affordable marketing vehicles, such as podcasts or webinars, through your website.
- Create an online customer loyalty program offering advanced notice of sales, discounts, referral bonuses, and coupons.
5. Network, Network, Network
Get to know other people in your community who can refer customers and help build your business. Don’t know where to start? Find a local business networking group or contact your chamber of commerce. Consider joining a professional association—either a local one where you can meet people in person or an online group—to tap into others’ ideas.
6. Lower the Costs
A gloomy economy can disguise some great ways to save money. Creative ideas to lower your startup costs include:
- Using the economic situation as leverage when negotiating rents, equipment leasing agreements, etc. Lessors, developers, and vendors need businesses to pay their rent and fulfill their contracts. You may be able to get a lower price if you can demonstrate the ability to deliver on time and in full at a lower rate.
- Buying supplies from businesses that are closing or need to reduce inventory, particularly for big-ticket items such as electronics, office furniture, etc.
- Bartering with other business owners by looking for business alliance possibilities and suggesting offsetting costs by trading products or services.
- Doing your legal homework before shelling out big money to a lawyer through online sources such as Findlaw.com, which provides free resources and low-cost services.
- Online comparison shopping for the best deal on a business credit card, looking for rewards, record-keeping tools, and other special services, as well as reasonable rates and low fees.
- Find a bank account that fulfills your small business needs, including access to brick-and-mortar and online services as well as attractive interest rates and rewards.
The Bottom Line
There are unique benefits associated with starting a business in a tough economy. If you do your homework, think strategically, and take advantage of every opportunity to minimize costs while maximizing the value you add for customers, you can build a foundation for long-lasting business success.