The inevitable recession caused by the coronavirus pandemic may not seem like the best moment to consider starting your own business. People will lose their jobs, customers will spend less, and many businesses may go out of business. However, as contradictory as it may appear at first, starting a business in a downturn can have its benefits. Here are five reasons why a downturn in the economy can be the ideal time to start your new business.
Because Other People Will Not
The first reason why a recession is a great time to start a business is because others in your industry will be hesitant to do so as well. Most people become more risk apprehensive during a downturn, thus they are more inclined to put their company ambitions on hold. Because your competitors are hesitant to enter the market, you will be able to gain a footing before they do.
Established Business Will be Struggling
When a recession hits, a well-established company will be prepared for increased turnover. A business that was profitable prior to the recession may now be saddled with large fixed costs that it can no longer afford. A new business, on the other hand, can begin optimizing for the sluggish economy right once. You can start with a leaner, more nimble organization and possibly undercut even larger competitors on price.
Greater Availability of Labor
During a recession, people of all skill levels are likely to lose their jobs, which will increase labor availability and lower the cost of employing workers. As a result, businesses that start up during a downturn will be able to hire higher-level staff at lower salaries than they would have been able to during a boom.
People Will Be Looking for Cheaper Alternatives
Consumers and businesses alike will be looking for cheaper alternatives to products and services during a recession. As a result of your lower operational costs, you’ll be able to undercut established suppliers by offering more reasonable goods.
Being a New Business Will be Less of an Obstacle
It might be difficult to compete against more established competitors when you first start a business. Even if the costs and terms are better, customers are usually hesitant to acquire from a company with no track record. People will prioritize saving money over most other factors now that the economy is in free collapse. Your lack of trading experience will not be a barrier to new sales, as it would be in a rising economy, as long as your product holds up to scrutiny.
Cheaper Supplies
During a recession, everything you need for your new firm will be less expensive. Renting a building will be less expensive, raw materials will be less expensive, and ordinary supplies will be more accessible. In some circumstances, you may be able to arrange long-term supply agreements that will save you money both during and after the crisis.
Get Better Terms from Suppliers
During a recession, you’ll find that suppliers are more willing to negotiate terms, in addition to cheaper pricing. You should be able to negotiate lower minimum order amounts and better credit conditions, for example. When it’s difficult to attract clients, suppliers are more eager to bargain and collaborate with you to achieve a win-win solution.
Cheap Goods Will be Available at Auctions
Auctions will be held to sell the assets of companies that have ceased to operate. As a result, during a recession, you will be able to purchase machinery and office furniture at far cheaper prices than usual. During a downturn in the economy, you could even be able to buy a company outright for a low price. While no one enjoys profiting on the misfortune of others, if you do not take advantage of the assets being liquidated by another company, someone else will.
Borrowing Money Will Cost Less
Interest rates are kept high when the economy is growing to keep inflation under control. During a recession, however, governments and banks will lower interest rates to stimulate the economy. It, if you need to raise capital for a new business, now is the most cost-effective time to do so. Even after the economy begins to recover, interest rates are likely to remain low. As a result, you’ll be able to get low-cost financing for numerous years.
It Makes an Excellent Brand Story
Starting a business amid a recession can bring several chances for public relations and marketing. A story of an entrepreneur who defies the trend and brings a product to market amid a downturn in the economy, for example, would be a hit with the media. Depending on the goods you offer, you may also be appreciated for providing a necessary item at a reasonable price during difficult circumstances. When things return to normal, you’ll be able to tell people that your company was formed during a recession and survived a global pandemic. What a fantastic “About Us” page that would be for your company’s website!
Conclusion
As you can see, a recession could bring less competition, reduced startup and operational expenses for new enterprises. So, if you have a product or service that people will still need in a downturn, now might be the best moment to start your new firm.
Can firms succeed during a downturn?
- During economic downturns, not all firms and industries suffer equally.
- Consumers are cutting back on substitute items and other competitive options, which benefits certain businesses.
- Many of the firms that do well during recessions either supply goods and services that grow in demand directly as a result of the recession, provide cheaper alternatives to luxury or big-ticket expenditures, or have relatively inflexible demand in response to fluctuations in earnings.
Do people start enterprises more during a downturn?
The present slump, dubbed “the Great Lockdown,” is likely to result in long-term changes in how and where we conduct business: at home versus at the office; online versus in person. It will open up new possibilities for contract tracing and monitoring tools. It will spur the creation of more advanced data processing technology, as well as possibly a better nose swab!
Because of the peculiar character of current recession, an entrepreneurial entrepreneur may be able to fill a gaping void.
The research backs up the theory that downturns can be a source of inspiration for entrepreneurs. According to a 2009 research by Dane Stangler for the Ewing Marion Kauffman Foundation, more than half of Fortune 500 companies were founded during a recession or bear market. General Electric GE,+1.08 percent, General Motors GM,-1.78 percent, IBM IBM,+0.10 percent, Hyatt Hotels H,-0.72 percent, Hewlett Packard HPQ,-1.93 percent, and Microsoft MSFT,+0.36 percent are among the firms on the list.
Even though the economy spent roughly as much time in recession as in expansion before World War II, Stangler, a fellow at the Bipartisan Policy Center, says the Fortune 500 result is “compelling when we look at when our largest corporations were founded.”
An economic slump provides a ready-made pool of labor looking to be re-deployed for the aspiring entrepreneur. The cost of borrowing is cheap. Existing businesses are typically trying to get rid of surplus equipment or office space at a low price.
However, according to John Dearie, president and founder of the Center for American Entrepreneurship, “the main driver that promotes entrepreneurship during downturns is necessity.” “Perhaps someone has had an idea for a new business and has recently been given the opportunity to pursue it.”
“Economic downturns can spur entrepreneurship,” Dearie says, “but there are crosscurrents that make it more challenging.” “Money is cheap, but credit is hard to come by.”
In a downturn, how do you make money?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
What is a recession-proof industry?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.
A recession favours whom?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
How can a company survive a downturn?
Risks if they occur and unforeseen events are less likely to impact your firm the stronger it is. Financial management is only one aspect of a company’s strength. It also contains techniques for retaining and expanding your customer base, marketing your business on a budget, maintaining high employee morale, and improving business processes. You should also look for ways to network and build partnerships, as this will reduce your risk exposure.
The following tactics should be considered if you want to strengthen your firm during a slump.
How does a recession affect a company?
As sales revenues and profits drop, the manufacturer will reduce or stop hiring new staff altogether. The firm may stop buying new equipment, decrease research and development, and halt new product rollouts in order to reduce costs and improve the bottom line (a factor in the growth of revenue and market share). Marketing and advertising expenses may also be decreased. These cost-cutting initiatives will have an influence on other businesses, both large and small, that supply the items and services that the huge company need.
In the event of a crash, where should I put my money?
Bank CDs and Treasury securities are suitable choices for short-term investors. Fixed or indexed annuities, as well as indexed universal life insurance policies, can yield superior returns than Treasury bonds if you invest for a longer period of time.
In a downturn, where should I put my money?
When markets decline, many investors want to get out as soon as possible to avoid the anguish of losing money. The market is really improving future rewards for investors who buy in by discounting stocks at these times. Great companies are well positioned to grow in the next 10 to 20 years, so a drop in asset values indicates even higher potential future returns.
As a result, a recession when prices are typically lower is the ideal time to maximize profits. If made during a recession, the investments listed below have the potential to yield higher returns over time.
Stock funds
Investing in a stock fund, whether it’s an ETF or a mutual fund, is a good idea during a recession. A fund is less volatile than a portfolio of a few equities, and investors are betting more on the economy’s recovery and an increase in market mood than on any particular stock. If you can endure the short-term volatility, a stock fund can provide significant long-term returns.