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Understandably, few entrepreneurs are eager to think about recessions. Customers tighten their wallets, banks take a closer look at business loans that can catapult startup growth, and you get the feeling everyone’s hunkering down and waiting for it to be over, like a gloomy winter storm. Well, I can’t anticipate every pro and con you may encounter as an entrepreneur, but there are plenty of pros to skim from recessions. Yes, it’s possible. Read on for the startup’s guide to winning in a recession.
Build a customer base
Build a customer base during an expansion that is “bursting at the seams” and, if possible, don’t add capacity until a recession. It is tempting to expand ahead of the growing demand curve. After all, otherwise, you will be stretched to fill the need you already have, inevitably make mistakes, and alienate your budding list of clients. To some extent, that is true, but there’s a time for expansion, whether in terms of hiring more staff, adding more floor space, or launching more products. During a recession, everything is on sale because people are desperate to turn anticipated future gains from assets into cold hard cash now. Use that sense of urgency to your advantage and get great deals on leases for additional real estate, inventory, and whatever else you may need.
Gauge demand during the early phase of a recession
If customers/clients do not curtail spending significantly, take fixed-rate loans at favorable rates for limited expansion. Remember, even resilient customers can always come under financial stress and/or decide to take their business elsewhere at any time, hence “limited” expansion, and even after observing spending patterns. Better to be too late and settle for pennies when you could have had dollars as opposed to jumping the gun and end up in the red because new assets and debt can’t be turned into profits due to lax customer demand. Analyze your balance sheet and prior spending habits of your clientele to evaluate the ability to maintain cash flow through the capacity addition and/or loan expense.
If taking out fixed-rate loans, aim for smaller lenders. Bigger institutions can afford to be more risk-averse and will judge a startup harshly at any time, let alone a recession. A smaller, ideally, startup-y lender may think your enterprise just as reckless as a stereotypical MegaBank but, to be blunt, they are more desperate for money and more willing to negotiate with you during loan origination and repayment. Use this to your advantage and always emphasize to any lender long-term viability and income stream instead of short-term bursts of profitability with less guarantee overtime.
Acquire small competitors or their assets at favorable prices
Remember, they are hurting too. Entice competing business owner(s) with the freedom of cash in their pockets instead of an ongoing uncertainty that is small business management. Of course, this begs the question of why you would want the “ongoing uncertainty.” Because it is, ideally, a source of cash flow or an appreciating commodity that will soon pay dividends above and beyond the aforementioned stress. Do your homework here. Don’t jump on the first thing that looks good because then you won’t have the means to buy the second thing that turns out to be great.
Offer stability and long-term contracts to any partners, employees or customers
Long-term reliability, especially in terms of income, is seen as more important than short-term perks, promotions, deals, or dollars/hour for employees. Negotiate fairly but favorably. Keep in mind that you need their help and that in quite a few cases, an employee’s combination of talent and personality is difficult to replace. Value and respect them accordingly. You can always stuff bodies into a cubicle or a payroll spreadsheet, but for them to be an enduring generator of value and a sense of pleasure to work with is the proverbial rare goose that lays golden eggs.
Pay employees with time
Virtually every employee or contractor will have “downtime” that they sneak in and/or tactically do slow busy-work to look good for the boss when he (you) walk by. Instead of forcing a culture of feigned productivity and false compliance, let your employees off the hook and let them go home early. Money is tight in a recession, and you can explain to them that for the work they do, they will be paid fairly, but for appearances and appeasement, there is no value to the business. If you simply cannot give extra financial benefits, give them time. Money can be made up, but time is once-and-gone. Value their time, and if there is little to do for the day, let them go early with no repercussions.
This isn’t to encourage slacking. The emphasis is on completed good work done early. I have been in situations where I and others played “wait out the clock” because it looks bad to leave early, but, honestly, there was nothing to do. This was more than a trifle that wasted my employer’s money, my time, and accomplished nothing for anybody except to conform to a culture of “you have to do your 8 hours no matter what.” This was at a government job, by the way. Your tax dollars at work.
Some additional ideas
Incorporate a countercyclical revenue stream that sees more demand in a recession. We don’t all have to be debt collectors and mob enforcers, but you understand that in a recession people will want to:
- Repair their cars and other property as opposed to replacing it.
- Get away from all the stress on a budget.
- Try their luck with gambling.
- Switch jobs/careers, and require resume and interview help doing so.
- Buy in bulk and hunt for discounts.
- Insure against risk, real and imagined. Consider providing supplemental insurance or income/loan repayment. An example of opportunity lies with health insurance:
“An estimated 60% of cancer costs are nonmedical expenses and not covered by typical health insurance.”American Cancer Society: Cancer Facts and Figures 2014 page 3.
Identify critical tasks/projects that require expertise.
Advertise hiring, with emphasis on small bits of equity or revenue sharing as compensation. This gives flexibility in offering fixed wages that, to an entrepreneur, can be painful fixed costs if the employee or the market isn’t matching up to the entrepreneur’s hopes.
At least consider these pointers. An entrepreneur who isn’t ready for a recession might as well go back to the job boards and apply for a 9-to-5 where Corporate decides how the business stays afloat. If you want to make a difference and generate real wealth, you will have to weather the storm sooner or later. The above guidelines will help you in critical times. Hard work is great, but the wrong decision can sink a new business. Make the right decision about operating your new business in a recession, and you will come out ahead.
Do you have any suggestions on how to weather a recession as a startup? Let us know in the comments!
This article originally published on GREY Journal.