Starting a small business is hard work in any environment, but it's even harder in a tough economy. This is partly because when credit markets are tight, it can be challenging to get financing. That’s why it’s crucial for small business owners to hone their business plans. In other words, if you want a slice of the financing pie, you better work your cash projections really hard and know your bottom line down to the penny—how much money you need to put into the business, how much you need to charge to meet your operating costs and, hopefully, what you need to do to realize a profit.
If you’re thinking about making the leap into entrepreneurship, consider the following tips to successfully build your business in a difficult 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.
- Start small and expand when things start to pick up.
- Use any available technology, make sure you network, and find ways to lower your costs.
Can You Be Successful?
It goes without saying that 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 start 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?
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.
- You’ll 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.
- Customers you gain during this time are more likely to stick with you when the economy makes a change 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.
Actually, some businesses thrive during times of economic uncertainty. If you’re considering starting a business, make sure you do your research.
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 applying for a loan, ask trusted friends or professional advisors to review your business plan to make sure you’re not overlooking anything critical or making inaccurate assumptions. You may consider asking the following sources:
- Friends who own their own business
- A loan officer at the bank where you do business
- An accountant, but first get an estimate for reviewing your plan, so you aren’t surprised by a high invoice
In addition to securing financing for your new enterprise, come up with a financial backup plan both for your business and personal finances if you fail to hit your initial revenue projections. You should also build up your personal cash reserves so you 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.
The Covid-19 pandemic has officially thrown the U.S. economy into a recession, and there are fears that conditions as bad as or even worse than the Great Depression lie ahead, thanks to 30 million people unemployed as of May 1, 2020, with those numbers expected to increase. If you plan to start a new small business during these trying times (say, manufacturing protective face masks), it’s imperative to think extremely carefully. If you already have a small business, and it is in financial straits, be aware of the government’s emergency Paycheck Protection Plan, which is offering forgivable loans of up to $10 million to small business owners.
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 really 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, are you able to 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, so you can differentiate yourself and gain market share. For example, think about where your competitors aren’t operating or which potential customers they’re missing, then capture that segment of the market.
Start Small…With a Plan to Expand
Manage your expectations and your 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 completely?
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 great talent for less compensation than in a positive market.
Be realistic about which employee benefits you can offer and shop competitively for the best prices. It’s better for your employees to offer fewer benefits upfront and add them as your profits increase then it is to offer too much right away and find out you can’t afford to maintain them.
Use Technology to Your Advantage
These days you can’t get away with starting a business without using technology. Technology can provide you with numerous ways to save money and increase profits. For example:
- 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
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.
Ideas for Lowering Costs
A gloomy economy can actually 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 pay on time and in full at the 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 own 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 good rates and low fees
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.