Not that a recession is the best time to start a business, there is always a glimmer of light in even the most dire of times. Please read the list below to gain insight on a few competitive advantages that new startups realize when entering the market during an economic contraction. Capital West Advisors assists companies with business planning and capital introduction services.
1. Less barriers to Entry
During hard times, many companies exit the industry because they feel that the best times have come and gone. Economic contractions are great opportunities for newcomers to enter an industry and bring fresh and more innovative business models that replace those that have exited. Because there are fewer players, you also have a chance at gaining more market share.
2. Financing equals perceived lower risk by the market
Although most banks have closed their doors to many different forms of small business financing, private investors are abundant and looking for sustainable business models that can make up for recent market losses. If you are able to gain financing during an economic recession, consider the fact that a risk averse investor believes that you may be sitting on a gold mine during an economic downturn. The other side of the coin is a situation during an economic growth period where you are pooled with hundreds of other companies and your investors had no faith in your business model to begin with.
3. You will be ready for the good times
Companies that have established their businesses during tough economic periods have adapted their business models to more rigid cost requirements while paying the bills. Proving such discipline places companies in an extremely advantageous position as the economy begins to recover and gross profits soar.
4. Lower costs of entry
Many vendors and exiting companies offer fire sale discounts on services and assets during times of economic contractions because wholesale businesses suffer and liquidity for capital assets decreases as a result of rigid lending parameters.
5. Return of the little guy
Remember those neighborhood initiatives fighting to protect their cities from being invaded by large low priced, high volume super stores? Well, those stores are consolidating their business plans due to oil prices and fuel price effects on centralized distribution networks. In other words, it is getting expensive to ship one hundred thousand two dollar bottles of pickles from New York to Alabama. The United States is beginning to see a changing of the guard from the large conglomerate “everything for as cheap as possible” stores to the return of Uncle Andy’s hardware store.
6. Cheaper Employees
Real Wages have declined in cost significantly since the 2001 dot com bubble crash. The major reason involves the fact that barriers to entry for jobs in many industries have decreased and some jobs have even been outsourced to countries where wages are as low as one dollar per hour.
Nothing is guaranteed in business during any cycle, but not everything is gloom and doom when the market takes a turn. If anything, you need to have solid business planning. Go to www.capitalwestadvisors.com to see a list of our business planning and capital introduction services.