Starting a business when economic conditions are tough

When market and employment conditions are uncertain, starting your own business may be an option worth examining.

In an economic downturn, overall economic activity decreases. As a result, businesses could experience falling sales, cashflow problems, employment freezes or redundancies. However, in such a climate there are also opportunities to be exploited.

This guide looks at how, by choosing the right type of business and conducting it in the right way, your business could thrive when economic conditions are tough. It looks at the key factors that can help you successfully start up and run a business during a period of economic volatility, and shows you how a well-thought out business idea, proper sourcing of finance and good business planning can ensure that your business has the best chance of success.

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Work on your business idea

A good business idea is essential to setting up a successful business. You can use what you know about the volatile financial climate to help you develop a targeted and specific business idea.

Your business idea

If you don’t already have an idea, consider which of your skills could be used as a base for starting a business. See our videos and e-learning resources to develop your business idea.

Some types of business are more likely to succeed in a volatile financial climate than others. If you want to start up a business but you haven’t decided which area you’d like to work in, find out what sorts of business are thriving, and what about them makes them ‘recession-resistant’. You could also look into:

• the ‘essentials’ markets – eg food and house maintenance
• the affordable luxuries market – in an economic downturn, the market aimed at people aged over 50 may still be growing, as they may have equity in their property and savings
• existing businesses – not only is buying a business which already has established revenue a safer option, but you might get a bargain in difficult economic times
• franchises – an established franchise stands a good chance of surviving when economic conditions are tough as they have experience and time-honed, streamlined systems and processes

Once you have a business idea, you should research whether there is a market for your product or service and formulate a business plan. If you need start-up capital, lenders will usually request a business plan.

Test your business idea

You can use the economic downturn as an opportunity to define what you and your business want to achieve – and how best to set about achieving this. Ensure that the customer is central to your business idea. Consider whether they would really buy your product or service, particularly in the context of the current market.

Difficult market conditions are often caused by very specific issues, such as an unavailability of loan finance. Diagnosing these issues and seeing to what extent they affect you will allow you to rethink the nature and scale of, as well as the market for, your business.

It is worth looking at the business pages of newspapers for information about the issues involved in an economic downturn and their effect on businesses. Understanding these issues will help you develop strategies for coping with them.

Once you have tweaked your business idea for current market conditions, it needs to be implemented through a full business plan and a decision on the legal structure of your business.

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Your business structure and business plan

You need to decide what legal structure will best suit your business. Carefully consider the advantages and disadvantages of each option because the structure will affect:

• the tax and National Insurance you have to pay
• the records and accounts you have to keep
• the way management decisions are made

Some of the options are:

• Sole trader – The simplest way to run a business. Accounts are straightforward and profits belong to you, however you are also personally liable for any debts.
• Limited liability company – Including private limited companies. You must comply with strict regulations, but can raise money through shareholders. The company’s finances are separate from the personal finances of their owners.
• Partnership – Two or more people share the responsibilities of running the business, and take equal share of both profits and debts.
• Limited liability partnership – Similar to a partnership but liability is limited to what each partner has invested and any personal guarantees they have given.

Other company formats include franchises, social enterprises and co-operatives.

For guidance on deciding which structure would best suit your business, see our videos and e-learning resources to choose the right business model and legal structure.

Creating a business plan

A business plan describes the business’ objectives, its strategies, the market it is in and its financial forecasts.

Going through the process of writing the plan should focus your mind on everything from where the business will be based to where you are going to find your first customer.

It is also a blueprint for the future development of the business that potential investors will want to read before they lend to you.

Your business plan should include:

• an executive summary
• a description of the business
• a marketing and sales strategy – who you think your customers are going to be and how you are going to reach them
• information on your management team and personnel
• information on your operations, including your business premises, your IT and management information systems
• financial forecasts – how much you need to start the business and where you are going to get this money from, how much you think the business is going to make and what salary you plan to take, etc

See our videos and e-learning resources to create your business plan.

After the business plan, you should consider writing a marketing plan, which sets out how you will target and interest potential customers in your product or service. See our guide on how to write a marketing plan.

Business support organisations can help with setting out your marketing and business plans and you may also be able to attend start-up events or courses which cover writing a marketing plan as part of their content.

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Access to sources of starting-up finance

If you need to raise money to start up your business, there are various options, including:

• Using personal money – such as savings, redundancy payments or a pension windfall.
• Approaching a bank or business investor for a business loan – this may be more difficult during a credit crunch. Any lender will want to review a detailed business plan before loaning any funds. See our guide on how to use your business plan to get funding.
• Applying for a grant – there are many business grant schemes nationwide, geared to different industry sectors and project scales. You should be aware that applying for a grant may take some time. Search our business support finder for grants, loans, expertise and advice for which your business may be eligible- Opens in a new window.

Essential to raising finance is convincing investors or grant bodies that your business is sound. This means showing that your idea is worth investing in and that you have what it takes to run your own business successfully.

Top five tips on getting finance

• Make sure you have a realistic business proposal. Have you calculated the money needed to start up?
• Think about and plan your ongoing budget
• Start to plan your finances by thinking about costs, living expenses and sales targets
• Make time to do your market research. It helps to show you are serious about your business
• Be prepared for probing questions

Loans and grants

Banks are not the only option when it comes to business loans. You could also explore the following:

• Angel investors, or business angels, usually provide funds in exchange for a small stake. They typically invest between £10,000 and £750,000 and are often just as valuable for their contacts, insight and experience as for the investment they can offer.
• Venture capitalists may demand a large percentage of your business in exchange for investment. Ensure you have a clear understanding of their expectations.

Find out more about angel investors and venture capitalists in our guide on equity finance.

The Enterprise Finance Guarantee aims to help smaller credit-worthy companies that are unable to obtain a conventional loan because of current tight lending conditions. Find out more about the Enterprise Finance Guarantee on the Department for Business, Innovation & Skills (BIS) website.

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Develop an effective survival strategy

It’s never too early to identify risks and learn how to address and manage them.

Risk management

It is important to identify the key risks your business may face and develop strategies to eliminate or reduce them. This will make your business more flexible and more able to withstand volatile market conditions.

Common risks include:

• losing customers and failing to attract new ones
• increased competition
• poor cashflow
• failure to anticipate problems/inability to adapt to changing market environment

For more information, see our guide on managing risk.

Customers and competitors

You must have a clear strategy for identifying and looking after key customers and for developing relationships with them. You should try to plan for worst-case scenarios, such as losing a major customer, and expand your customer base as quickly as possible to reduce the impact such a loss would have on your business.

You also need to consider potential opportunities that could arise, for example, if one of your competitors ceases trading.

Read our guides on how to manage your customer care and retain and grow your customer base.

Keep your cashflow healthy

Cashflow is the balance of money entering and leaving a business. It is important to anticipate cashflow problems as early as possible, so that solutions can be found before the problem becomes too serious.

At all times you should know how much money your business has in the bank, how much it owes and how much it is owed. If you regularly update your financial records and develop forecasts showing likely sales, profit and loss, you should be able to identify when additional funds might be required.

Find out about good cashflow management on the Department for Business, Innovation and Skills (BIS) website- Opens in a new window.

If you anticipate serious cashflow or funding problems in the early stages of your business, seek advice from your accountant or your bank.

For more advice, read our guides: cashflow management: the basics and identify potential cashflow problems.

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Minimise costs and maximise efficiency

When starting up a business at any time, it is important to ensure that your business is lean and efficient, but this is particularly the case when wider economic conditions are difficult.

Minimising costs

Even this early on in your business, you may be able to reduce your business costs, just by considering whether:

• any element of your business product or service can be removed while still allowing the product or service to meet its requirements
• there are cost-effective alternatives to high-cost elements

You may be able to make savings on your fixed costs (often called overheads), which you pay for regardless of how much you produce or sell. They include rent, rates and wages.

You may be able to make savings on your variable costs, which are linked to how much you produce or sell. Variable costs include materials, packaging, overtime and transport costs.

Choosing and managing your suppliers

Different suppliers can vary greatly in terms of value for money, reliability and quality. Be prepared to shop around until you find the best supplier to meet your specific needs. See our guide on choosing the right suppliers.

To minimise your costs, relationships with suppliers should be managed effectively and their performance assessed regularly. Become a valuable customer by being reliable in placing orders and paying on time. Consider drawing up a contract or service level agreement to ensure that you receive good service from them. Read our guide on how to manage your suppliers.

Your bank is also a supplier so try to minimise your banking costs and make sure you get the cheapest form of credit available. See our guide on how to choose and manage a business bank account.

Maintain a good relationship with your bank or other lender. Always try to be personally involved in dealings between your business and the lender.

The personal approach

Take a personal approach to every aspect of your business start-up, to create a good rapport with the suppliers and customers who will be instrumental in helping your business succeed.

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Sources and contacts to help you start a business

There is a wide range of government support available to businesses, not only through grants and other funding but also through numerous advisory, guidance, information and other services, including training. See our guide on government support for businesses.

Grants and loans are available to some businesses. Search our business support finder for grants, loans, expertise and advice for which your business may be eligible- Opens in a new window.

There are different organisations which specialise in offering advice and/or financial help to different types of entrepreneur, for example:

If you are over the age of 50, Prime offers you free information, advice and training to help you start up a business. You can find practical advice on starting a business on the Prime website- Opens in a new window.

If you are starting up a co-operative, employee-owned business or social enterprise, Industrial Common Ownership Finance (ICOF) can offer loans of between £5,000 and £50,000. You can find out if you are eligible for a loan from ICOF from the ICOF website- Opens in a new window.

If you are disabled and starting a business, the Access to Work scheme provides grants to employers towards any extra employment costs resulting from an employee having a disability. Find out about Access to Work on the Jobcentre Plus website- Opens in a new window.

If you are starting up a minority ethnic business – the Asian Business Development Network (ABDN) is a network of entrepreneurs from across minority ethnic communities. It aims to encourage ethnic minority entrepreneurship. You can find support for starting up a minority ethnic business on the ABDN website- Opens in a new window.

If you are aged between 16 and 30 – Shell LiveWIRE provides advice and practical support in starting up your business. Find guidance on starting up a business on the Shell LiveWIRE website- Opens in a new window.

If you are aged between 18 and 30 and unemployed – the Prince’s Trust could offer a loan of up to £5,000. It also offers practical support, such as personal development courses, work experience, skills and qualifications. Find out how to apply for a Prince’s Trust loan on the Prince’s Trust website- Opens in a new window.

If you are a woman – Prowess is an association of organisations that specifically support women in business. Find support for women in business on the Prowess website- Opens in a new window.

If you need to improve your business skills before or after starting a business, you can apply for a Professional and Career Development Loan. Find out about Professional and Career Development Loans on the Directgov website.

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CASE STUDY

Here’s how I started a business during an economic downturn

Siggi sold his first collection of hats to Harvey Nichols in 1982 and was soon supplying boutiques and department stores with hats on a wholesale basis. In 2000, he opened a shop in West London to develop the retail side of his business. Siggi Hats has remained a small but flexible business – Siggi sees flexibility as key to survival during an economic downturn.

Listen to the audio, or read the transcript below;

“My name is Siggi Hesbacher and I run the shop Siggi Hats. We specialise in ladies’ hats, made bespoke for weddings, garden parties, the races.”

“I started my business just after Thatcher had come in, after the big black winter in the seventies – 79. So we felt the after-effect of the seventies, but change was happening. When I started off, we concentrated on turning over huge amounts of cheaper hats. This has changed over the years, and I think at the moment if you were going to start in business, you really have to think what product you want to sell.”

“In the early eighties a lot of shops which weren’t solid shops just went out of business, and I’m sure that’s happening again now, that a lot of shops just have to close down because either their products are not needed any more – not wanted any more – or people are much more careful about what they are spending their money on at the moment. I think that’s the cycle that’s repeating itself now.”

“Well, if you want to set up a business now, do your market research very well. Make absolutely sure you’ve got a product you believe in, a product people want and/or need. Otherwise, don’t even bother at the moment because you have to make sure that when you’ve got something you can make it work.”

“The most important thing is to get your pricing right, you have to sit down and work out how much you have to charge to make it all work.”

“Make sure you’ve got your finances sorted out – it’s very important, you can’t just jump in and hope it will work out – it won’t. You’ll just hover around for a little while, then you’ll go under.”

“The way it is at the moment, the benefits are that some existing businesses are disappearing, so there might be space opening up for someone new to come in.”

“Dangers could be that you come in with a product and it’s not really wanted, because people are very careful of spending, and that’s why you have to absolutely make sure your product will sell – that people want what you have to offer.”

“Because people are more careful about spending money at the moment, we have lowered prices on a lot of our products, just brought the prices down a little bit. The profit margin is not as high, but we do want our customers to come in and still spend money.”

“In the end it is really a way of learning, if you start off a business. Hopefully you don’t make too many mistakes, because that can cost dearly. We all make mistakes, as long as they stay on the manageable side. I think the reason I managed to survive so long is that we can be very flexible – we can adapt to a changing market, which we have done over the years.”