Sometimes, conventional wisdom isn’t very wise at all.
When the economy hits a rough patch, the first instinct is to be prudent and play it safe. Yet the history of business shows that some of the most successful companies today got their start in garages or basements when the economy looked its most bleak.
If you’re asking, ‘Should I start a business during a recession?’ consider that there are opportunities out there. Because an economy in turmoil creates more space for new ideas—which, in turn, means new players. Are you one of those, ready to make a little history of your own?
To be sure, a recession is no time to take foolish risks. But, with the right plan and a dose of prudence, an economic downturn can prove a time for opportunity when it comes to starting your own business. And charting your own destiny while you’re at it.
Have A Dream? Then Make a Plan
As the joke goes, ‘Follow your heart, but take your head along with you.’
According to PNC Bank’s Shana Peterson-Sheptak, Head of Business Banking, starting a business isn’t something you do lightly. It requires preparation, a thorough evaluation of the risks, and commitment to persevere no matter what.
“During a recession, there is more uncertainty. Not just in sales, but in the expense structure. So, it’s important to take inventory of where the risk lies. You can’t plan for every contingency, but you need a plan for getting sales, making cash flow more efficient, retaining employees, and the inevitable supply chain issues.”
That means preparation is one of the most critical parts of starting a business. And that begins with having an airtight business plan, one that maps out both how you’ll survive the tough first months and how you intend to grow.
“A business plan isn’t just about the pro forma financials,” continues Peterson-Sheptak. “It needs to answer important questions about your market, the need you’re trying to fill, and the cost or expense of moving that product or service.”
Some of the questions you should be able to answer include:
- Compared to your competition, what makes your new business unique? And how will that unique niche appeal to buyers?
- Analyze your market. For example, if starting a restaurant, what similar restaurants are nearby that might siphon off customers?
- How will you finance your operations over the long term?
- What unique skills and experience do you bring to the market?
To be sure, writing a business plan can seem intimidating. However, it doesn’t have to be. In fact, we have a great article to help get you off to a good start.
Another thing about your business plan: Don’t let it collect dust once your business opens. Instead, consider your business plan to be your ongoing road map, a living, breathing document that you consult regularly. It should be endlessly adaptable, constantly revised as your situation and the market changes.
Cash Flow. Your Life Blood.
Optimism is a good thing, but realism is what will get you through the initial tough times. And how long do those tough times last? On average, small businesses do not realize a profit for two or three years.
That’s a long time for a business owner to go without getting paid. And it’s even more important to realize that poor cash flow accounts for 82% of all business failures. With that in mind, you need to focus on having the funding to get you through the slow times—not to mention taking a long, cold look at any unnecessary expenses.
“Most startups struggle with access to and adequacy of working capital, especially during an economic downturn,” offers Peterson-Sheptak. “If you’re needing to borrow the money to get established, and that’s all you have to hire employees and acquire inventory, then that won’t appeal to a lender."
“Lending institutions can be one place to turn for financing, but they will need to know you have the resources to face uncertainty and keep going.”
That means very likely searching for working capital in a variety of other places, whether it’s savings, family, leveraging your home equity, or other sources. Each has their own advantages and disadvantages.
If you’re looking for ideas when it comes to raising funds, check out our article for great ideas, as well as a reality check or two.
Have a Bench of Experts
Nobody knows everything. But everybody knows something.
As part of your plan, look beyond the dollars and cents, and take an objective look at your skills and experience.
You might be the world’s greatest chef or architect or designer. But how good are your accounting chops? Do you know the ins and outs of business law? Are you an expert marketer?
The good news is that you don’t have to be a pro at any of those disciplines. You just need to tap into the expertise of others when those skills are needed.
“The more experts you find before hanging out your shingle, the better off you’ll be,” Peterson-Sheptak continues. “Determine what gaps you have. Then fill those gaps with trusted advisors, whether you need an accountant, an attorney, marketing, real estate, banking, or HR. Then really listen to their advice. Because everybody you talk to will want you to succeed.”
If you’re looking for valuable insight, the Small Business Administration is a wellspring of free information about almost every possible aspect of starting and operating your business.
Further, if you don’t have ready access to expertise, the Service Corps of Retired Executives (SCORE) is a non-profit resource of the Small Business Administration. It exists to help entrepreneurs by supplying veteran businesspeople from almost every conceivable field of expertise. The advice you get is confidential, relevant and, best of all, free.
One final pro tip: When it comes to communicating with your inner circle of advisers, take pains to give them as accurate a picture of your business as possible. The more they understand about the true status of your business, the more on-point their advice will be.
Want to know more? Check out our advice on how to develop and successfully work with your own board of advisers.
Think Big. But Start Small.
When it comes to starting a business, people tend to think in terms of renting office space or a storefront. But rather than taking the plunge, sometimes it’s better to dip your toe into the water first.
Especially in a dicey economic environment, it could make sense to slowly, but surely, nurture your side hustle or hobby into your main source of income.
“In truth, many successful businesses begin as something the entrepreneur did in his or her spare time,” Peterson-Sheptak points out. “Only when their side business gains momentum do they strike out on their own.”
It also is often the most prudent thing to do, she continues.
“When you go full time, that’s when you go all-in, putting your faith in your own ability. But doing it in a part-time way at first minimizes your risks. You get to properly evaluate your own abilities, test the market, and work out the kinks in your business model before fully committing.”
Without the immediate pressure to turn a profit, easing into business ownership gives you the opportunity to experiment, cultivate customers, and perform the kind of grassroots marketing that will pay big dividends down the road.
There’s Risk. But Reward, Too.
Starting a business is always tricky. Starting a business during tough economic times can be even trickier. But if you’re smart about it, have a solid plan, a team of advisers, and have the financial resources and banking partners to make it work, you’ll create the best conditions to achieve success.
If you have questions, PNC Bank may have answers. Our business experts can be a valuable resource with both the full range of products and insights you need. Let us know how we can help. Because when you succeed, we succeed, too.