10 reasons to launch a business in a recession

Worried about starting a business during an economic downturn? Here are 10 reasons why launching a new start-up in a recession can be a good idea.

When economic times are tough, conventional wisdom is to batten down the hatches and put start-up plans on hold while you weather the financial storm.

Yet research shows that launching a small business when the economy is on the ropes may be a good idea, with start-ups better able to exploit gaps in the market compared to existing companies.

The Covid-19 pandemic has been seismic in terms of the number of businesses it’s forced to close.

While the economic fallout may be felt for years, green shoots are appearing as new start-ups emerge that could help accelerate economic recovery.

According to data from Companies House, new businesses are launching at a faster rate than ever recorded previously.

The number of new companies incorporated in the third quarter of 2020 increased by nearly one third compared to the same period in 2019.

The result was an additional 51,269 new businesses started in three months – the largest increase since records began.

Why launch a business in a recession?

Contrary to popular belief, launching a business isn’t restricted to periods when the economy is booming.

Some of the world’s largest and most well-known businesses started during recessions, including global giants such as Microsoft and Disney, as well as recent companies such as Uber and Airbnb.

The UK has seen companies such as JD Sports, Wilko, Pure Gym and Sipsmith launch and thrive during economic uncertainty.

While a depressed economy is far from ideal, start-ups can be well-placed to quickly move on emerging gaps in the market or shifting consumer spending trends, laying the foundation for growth as the economy improves.

There’s no substitute for rigorous business planning when starting up.

But if you’re concerned about the viability of launching your business during a recession, here are 10 reasons why starting up may actually be a good idea.

10 reasons to start a business in a recession

1. Established businesses may be struggling

Start-ups can be the business equivalent of mammals facing established company dinosaurs that are slow to evolve in the face of a challenging environment.

Many existing companies have plans that assume the economy will continue to perform well, with costs committed to overheads such as retail premises and employees.

Big businesses may have cash reserves, but they can be more cautious and slower to act, leaving them vulnerable to sudden changes in customer spending.

Start-ups aren’t lumbered with existing processes and extensive overheads. Instead, new businesses can operate leanly from launch, adopting new and flexible ways of working.

Start-ups can use outsourcing and new technologies to deliver products and services that are different and offer more value to customers at a lower price than existing companies.

2. Interest rates may be lower

If you’re looking to borrow money to launch your business, a struggling economy can mean lower interest rates.

That may be bad news for established businesses with cash reserves, but it can be good news for start-ups looking to secure funding with a low interest rate.

This means it could cost less to repay a loan. Credit facilities – from credit cards to credit lines with suppliers – can also be cheaper.

3. Increased support for start-ups

Start-ups are often seen as the key to shifting a faltering economy into a higher gear. That can result in numerous schemes, grants and incentives designed to support the early growth of small businesses.

Besides national grant schemes such as Innovate UK and the National Lottery Heritage Fund, it’s worth exploring tax and benefit schemes such as the Government’s New Enterprise Allowance.

This pays an allowance of £1,274 over 26 weeks for people on benefits such as Universal Credit to start a business.

The Government has a dedicated finance and business support site that lists the different funding sources and grants available.

4. Securing investment may be easier

Raising money to invest in your start-up idea can be easier during financially challenging times.

If stock markets are in freefall and interest rates low, investors often look for other ways to invest their money and may be more interested in funding your venture.

Find out more in our guide to business funding.