Is there ever a perfect time to start a new business? Unless you have a crystal ball, it’s impossible to predict if your new venture will take off or fail. Of course, some economic conditions do seem to set the stage for success. You may feel understandably confident during a booming economy—especially if customer demand and investor interest are both high. Conversely, the idea of starting a business during a recession may give you pause.
This makes sense, given all the unknowns that an economic downturn brings. What’s more, there’s a very real link between economic crisis and stress. Many entrepreneurs may be skittish about launching amid ongoing uncertainty and decline. Be that as it may, an economic slump could actually be a business opportunity in disguise. It all depends on your perspective.
We’ve identified five reasons why starting a business during a recession could ultimately pay off.
Pros of Starting a Business During a Recession
Many would-be entrepreneurs may feel spooked by current economic conditions and delay starting a new business. But with so many existing companies forced to cut budgets and reduce their workforce amid a recession, new startups just entering the market may have a leg up over the competition. Here are several other reasons to consider starting a business during a recession.
1. Lower Startup Costs
Periods of economic decline can lead to cheaper startup costs. Just look at the current recession we’re in now. The coronavirus pandemic has been unique in that it’s completely upended the way we work. The mass exodus away from traditional office buildings has given rise to a burgeoning work-from-home culture. With demand for office space dwindling, entrepreneurs could score big with cheaper rent. Even office furniture and other equipment and necessities will likely cost less.
Startups also tend to run leaner than established businesses that have been operating for years. A recession bodes well for scrappy entrepreneurs who are already in the mindset of saving money, especially if you’re launching a new business that requires little capital. Companies that provide services, rather than goods, are inherently cheaper to get off the ground.
You’re also likely to find discounts in other areas of your business. For example, Facebook ad rates dropped in response to the pandemic, helping small business owners reach a larger audience for less.
2. Establish Good Habits
Entrepreneurs work for themselves, which is perhaps one of the biggest draws of venturing out on your own. This spurs a sink-or-swim mentality, no matter what the economy looks like. Starting a business during a recession will likely mean being even more budget-conscious than normal. However, this mindset could help lay the groundwork for long-term success. If your new business can survive—or better yet, thrive—during an economic downturn, what will it be able to do during periods of growth and expansion?
Once you find your footing, there are also steps that small business owners can take to prepare for future economic changes. Whether it’s an interest rate change, inflation, minimum wage increase, or update to the tax code, staying adaptable to change is key. We mention this because launching during a recession can be a teachable moment that shows you it’s possible to run a bare-bones operation without sacrificing your vision. In other words, it establishes a habit of resourcefulness you can take with you as you grow.
3. More Access to Talent
Recessions can have plenty of downsides, like higher-than-normal unemployment rates. We’ve seen this firsthand during the coronavirus pandemic. In May 2020, there were 20.5 million Americans looking for work. The bright side is that numbers like these could be good news for entrepreneurs planning to start a new business. Now more than ever, there are tons of capable people seeking employment. This talent surplus can empower you when it comes to building a skilled, reliable team.
The same goes for entrepreneurs who are looking more for a partner than an employee. A recession can be an ideal time to sync up with a likeminded businessperson who shares your enthusiasm and vision. With so many folks underemployed or out of work, you may be more likely to cross paths with people who are looking for a satisfying new endeavor.
4. Market Opportunities
Recessions are known to disrupt our daily lives. When economic activity slows down, consumers have no other choice but to adapt and grow in different ways. Case in point: The Great Recession sparked some degree of push-back against excessive luxury goods. As a result, it inspired a minimalist trend in everything from home décor to clothing. Designers, decorators, and home furnishing companies that reacted in kind were best positioned to benefit (and profit) from such a change.
It’s a lesson to keep in mind when starting a business during a recession. Think in terms of market need—what problems or consumer trends are being created by this economic downturn? The next logical question relates to how your new business can provide relief and solutions. Identifying new holes in the market is one way to leverage a down economy.
5. Energy Is High
Depending on your situation, getting laid off or furloughed during a recession could be a hidden blessing. Less than half of U.S. workers say they’re in good jobs, and most say they want their employment situation to be more than just a job.
An economic downturn could provide the nudge you need to realize a long-held dream—like starting your own business. Folks who have time on their hands, and ideally some cash reserves to fall back on, can use a recession to clarify their desires and craft a business plan that reflects those values. Motivation will likely be easier to come by if you’re working toward something you’re passionate about, as opposed to just a paycheck.
Cons of Starting a Business During a Recession
Starting a business during a recession creates unique challenges. That’s not to say that doing so is impossible, but being prepared for potential hurdles can help you overcome them more easily. Here are some important points to consider.
1. Difficulty Raising Capital
Most new businesses need some degree of capital to get up and running. When launching during a recession, you may find it more difficult to secure traditional sources of funding—especially as a new business owner without a proven track record. Part of the problem is that most traditional lenders will require that you be in business for at least a year before considering your application.
The silver lining is that there are funding opportunities out there for new startups taking flight during an economic downturn—and current low interest rates are a good thing. However, credit requirements and overall qualifying criteria tend to be stricter during a recession. Business credit cards or a home equity loan could be a worthwhile alternative if you’re short on personal savings.
If you’re open to sacrificing some level of equity to fund your new business, seeking outside investment might be something to explore. This includes approaching venture capital firms as well as angel investors (aka private individuals willing to put up their own money for a stake in your business), or even launching a crowdfunding campaign.
2. Many Are Cutting Expenses
When a recession threatens job security, many people respond by keeping a closer eye on their expenses. During the early months of the coronavirus pandemic, consumer spending fell by over 13%. This is precisely why understanding your market is so vital to your business plan. Identifying with your target audience is one of the best ways to ensure success.
For example, while overall consumer spending was indeed down during the beginning of the COVID-19 crisis, more than half of consumers also said they were willing to spend more to get the things they needed. The idea is to identify what those things are, then build a business that meets those needs.
The Bottom Line
Starting a business during a recession may not be as crazy of an idea as you might think—especially if you launch a company that’s designed to withstand economic ups and downs. Keeping startup costs lean and your target audience in mind can only help you. No matter what, be sure to develop a solid business plan. It’s something that can help secure funding and provide direction during the startup journey and beyond.
- Ncbi.nlm.nih.gov. “The correlation between stress and economic crisis: a systemic review”
- WSJ.com. “Facebook Ad Rates Fall as Coronavirus Undermines Spending”
- PewResearch.org. “Unemployment rose higher in three months of COVID-19 than it did in two years of the Great Recession”
- Vox.com. “How the Great Recession influenced a decade of design”
- Gallup.com. “Not Just a Job: New Evidence on the Quality of Work in the United States”
- NPR.org. “Consumer Spending Plunged More Than 13% in April Amid COVID-19 Pandemic”
- PRNewswire.com. “Deloitte: Seven Trends Impacting the Retail and Consumer Products Industries Amid a Global Pandemic and Beyond”