The UK’s economic downturn has been in the news a lot recently. Rising fuel costs have led to prices rising across the board, and the UK now faces a cost of living crisis. Alongside that, it was recently announced that the UK faces a recession.
Economic recessions are challenging times for everyone. Businesses fold, unemployment rates rise, and a general feeling of insecurity is in the air. So, why would anyone want to start a business in a recession?
The answer is simple: recessions create opportunities.
When other established businesses are struggling, it opens the playing field for entrepreneurs willing to take risks. If you’ve got a business idea and you’re thinking of forming your own company in a recession, we’re here to help. We’ve put together everything new startups need to know about starting a business during an economic downturn and six reasons why it’s a smart move.
The Effects of a Cost of Living Crisis and Recession
Living in the UK, it seems like we’re always on the verge of a recession or just coming out of one. Recessions have been a constant in news bulletins for decades, but many people are still not quite sure what a recession really is. According to the Bank of England:
“Recessions are defined as at least two consecutive quarters of negative GDP growth.” — Bank of England.
But even for the most financially savvy entrepreneurs, it can take time to determine what that really means — and, more importantly, what it means for businesses across the UK. While every recession is unique to its period, there are telltale signifiers of a downturn. These signifiers include:
- Rising unemployment
- Higher-income tax and national insurance contributions
- Consumer price inflation
- Increased consumer price index
- Decreased cash flow
- Lower consumer spending from UK households.
Established Businesses That Started in a Recession
A recession may seem like the worst possible time to start a business — but it can be the perfect time for new companies to get started. With less competition, more open-mindedness towards new ideas, and an increased focus on creativity and innovation, recessions provide opportunities that don’t exist during economic prosperity.
And there are plenty of businesses that started in recessions:
- Microsoft
- Netflix
- Airbnb
- MTV
- Disney
While it’s unlikely you will start the next Microsoft or Netflix (but who knows?), plenty of smaller UK-based businesses also started in recessions. Here are just some UK businesses that were new startups during a recession:
- Poundland
- Wilko
- JD Sports
- PC World.
- Sipsmith
As you can see, there’s quite a range of businesses that started during economic downturns. And if they can do it, why can’t you?
6 Reasons to Start a Business in a Recession
Reason #1 — Small Businesses Have Lower Overheads
One of the reasons businesses struggle during a recession is their overheads increase while their profits dip or remain the same. Established enterprises have long-standing overheads that include:
- Employees
- Suppliers
- Business premises.
Most businesses are committed to these overheads, which makes it difficult to reduce them without sacrifices like staff redundancies. As a new business, you won’t face the same difficulties. By starting a business in a recession, you can minimise your overhead costs and potentially beat your competition on price.
Reason #2 — Less Competition
Speaking of competition, with many businesses struggling and reducing their operations, you’ll have fewer companies to compete with. When businesses are struggling, many of them go out of business altogether.
This creates opportunities for new businesses to fill the void left behind. If you can provide a quality product or service at a fair price, you’ll be able to attract customers looking for a good deal.
Alongside that, you’ll be in a better position to meet customer needs. More established businesses may be unable to adapt to changing consumer demands despite their market share. This allows you to build your customer base.
Reason #3 — More Marketing Opportunities
During a recession, many businesses cut back on their advertising and marketing budgets to cut costs. This means there’s more opportunity for you to get your message out without spending a lot of money.
In normal or good economic times, large, established businesses pay large sums for advertising space, which makes it difficult for smaller operations to compete. But in tough times, one of the first things businesses reduce is their advertising spending.
You can take advantage of this by using free or low-cost marketing channels such as social media, content, and email marketing. If you have the funds available, you may also be able to use paid advertising to target areas where larger companies are scaling back.
Reason #4 — It’s Easier to Secure Funding
When the economy is struggling, it can be difficult to get funding for a new business. Banks are less likely to approve loans, and investors are more cautious with their money. However, there are still opportunities to secure funding during a recession, and in some cases, it’s easier than usual. The key is to focus on businesses with a low risk of failure.
For example, businesses providing essential products or services are more likely to weather an economic downturn. Recession-proof enterprises are also more appealing to investors looking for stability in troubled times.
Alongside private funding, there are usually government grants and funding available for new businesses. The government sees new startups as a major driver for the economy and makes funding available to entrepreneurs. As a result, starting a business in a recession can actually be easier than starting one during an economic boom.
Reason #5 — Better Talent Is Available
One of the most common effects of a recession is an increase in the unemployment rate. Businesses looking to cut costs often turn to redundancies and downsizing their teams to save money and ensure their survival.
Redundancies and hiring freezes at other companies mean there is a pool of experienced workers looking for jobs. This presents an opportunity for new businesses to hire workers who are a good fit for their company culture and who have the skills they need to thrive.
In addition, these workers may be willing to temporarily accept lower wages than they would during prosperous times. As a result, businesses that start up during a recession may be able to hire better talent than they would during a boom period.
Reason #6 — You Have Time to Prepare
One of the big reasons that existing businesses struggle during a recession is their preparation is often limited. Most businesses have limited time to prepare their businesses for a recession. While they can pay attention to the economy and predict a recession, they often have to rush their preparation.
As a new business starting during a recession, you don’t need to rush. You have the opportunity to recession-proof your business. You can do this by:
- Ensuring there is customer demand for your product or service
- Keeping your overheads low
- Hiring the right team
- Finding gaps in the market.
By doing this and taking time to plan, you can ensure your business will be a success and you’ll be in a great position when the recession ends.
Start a Small Business with Mint Formations Today
If you’re thinking about starting a new business during a recession and want to know more about how to get your company off the ground in a tough economic climate, we’re here to help.
We’ve put together a complete and comprehensive guide on how to successfully start a business during tough times, covering:
- Everything you need to know about the current UK economy
- The impact of a cost of living crisis on businesses
- A step-by-step guide on how to start your business
- Tips for setting up a recession-proof new business
- Resources for funding and business advice.
All you need to do to download the guide is sign up for our mailing list, and you’ll receive instant access. So sign up today and get your free guide to starting a business during difficult economic times.
Ready to start your business? Mint Formations can help. We’re experts in company formations and help new startups get their businesses off the ground every day. Whether you’re looking to become a sole trader or form a limited company with Companies House, our team can help. Explore our formation services today, or get in touch with the team for more information.
