Starting a Business in a Tough Economy
Whether you’re unemployed, underemployed, fearful of a layoff or just bored with your job, at some point you’ve probably thought about starting your own business. And like most people, you’ve probably been held back by a host of concerns: whether your idea is good enough, how to get funding, whether you can live without vacation and medical benefits, whether you even have the chops. Now, there’s one more worry to add to the mix: whether it’s crazy to start a business in the wake of a recession.
Here’s the good news. First, all entrepreneurs face those same fears on the road to building a company. Second, many Fortune 500 corporations, including Procter & Gamble, IBM, General Motors and FedEx, were founded during a period of economic uncertainty. “If you launch your business during a difficult time, you know what you can do on a lean basis,” says James King, state director of New York’s Small Business Development Center. Then once the economy starts to bounce back, he says, you’ll be well-positioned to succeed.
We asked King and Rex Hammock, founder of SmallBusiness.com and CEO of the custom media and marketing firm Hammock Inc. -- based in Nashville, Tenn. -- what it really takes to stop working for the man and become your own boss.
Tip No. 1: Seek input.
For starters, you should run your business concept past a few impartial observers before pouring your whole self into it. “Family and friends are not going to give you an honest answer,” says King. And even if it is a great idea, you must remain open to the possibility that your better mousetrap simply might not catch on. If that turns out to be the case, adds King, be prepared to adjust and compensate.
Tip No. 2: Check yourself.
Feeling ready? Put yourself to the test. This online quiz, created by the Small Business Administration, will help you ascertain whether you truly have the drive, perseverance and skill set you’ll need to see your business succeed. Even if you don’t, the SBA offers tips on how to build those credentials. Take advantage of this advice before diving in.
Tip No. 3: Go it alone.
The simplest approach is a start-up with you as the sole employee. Says Hammock: “For consultants, contractors or freelancers, the opportunities are many. Companies are using contracted services to fill in gaps in their workforce.” Being an independent contractor often means you call your own shots and name your hours and fees. The downside is loss of vacation and medical benefits -- though there are ways around that. For medical coverage, seek out programs offered through industry member organizations or groups such as the Freelancers Union. You may have to forego vacations for a while, but once you have a solid client base, you should be able to afford a few weeks of unpaid leave.
Tip No. 4: Find financing.
Less simple, though not impossible, is the path for capital-intensive startups. Hammock warns that these are tough times for getting a loan. “Banks are requiring more personal guarantees and financial collateral than I’ve seen in my nearly 30 years of owning small businesses,” he says. But King claims it’s still doable. “The money is available,” he argues. “You just have to prove the case for it.”
How? Get your ducks in a row by putting together a solid business plan. If you’ve never written one and need direction, avail yourself of the largely free assistance of organizations such as the Small Business Development Center (or SBDC, which maintains help offices in every state in the U.S.). The better prepared you are, says King, the more likely it is that the major financial institutions will work with you.
Another prospective source of financing is credit unions, which picked up much of the small-business lending slack when big banks put on the brakes in the aftermath of the global financial meltdown. Depending on the amount of funding needed for your venture, you can also seek economic support from friends and family, from so-called angel investors or from venture capital firms.
Finally, King advises that you raise or borrow enough money to provide your fledgling company with adequate cushion funding. It may take you longer to turn a profit than you expect, and you don’t want to be left penniless mere months in.
Tip No. 5: Don’t super-size.
Once you’ve hung your shingle, avoid the temptation to grow too quickly. This is particularly true for companies that start making money sooner than expected. “Say you open a restaurant and it quickly becomes a hot spot,” posits King. Before you know it, you’re excitedly adding seating and staff. But chances are good that you’re merely experiencing a new-restaurant bump, and that customer traffic will soon come back down to earth. “If you misjudge that,” warns King, “it can be a disaster for your business.”
Tip No. 6: Beware of the competition.
When you do start to grow, competitors will likely appear where none existed before. “Someone else is going to try to replicate your success,” says King. He recommends going back to your business plan and adjusting it to respond to the new conditions. This will help you stay a step ahead of any changes that could affect your bottom line.
Tip No. 7: Focus on the right components.
The smaller you are, the more you’ll be building your new company’s reputation on the basis of two essential factors: quality and service. “Trying to compete in an arena where price is the only factor in your clients’ purchasing decisions is a train wreck waiting to happen,” says Hammock. “If you can help a customer or client be better at something they want to be better at, you’ve cracked the formula for long-term success.” In other words, make your clients look good, and you’ll look good too. And if that prospect doesn’t have you thinking about punching in your current job’s time card for the final time, nothing will.