The truth is, recessions happen, and they happen often. Since 1900, the U.S. economy has averaged one recession about every four years. They’re not so regular as to be predictable and they cause real economic damage, but they don’t halt business and entrepreneurship entirely.
In fact, according to a 2009 study by Dane Stangler for the Ewing Marion Kauffman Foundation, more than half of Fortune 500 companies were started during a recession.
That’s because, contrary to what you might think, recessions can be a good time to start a business or a side hustle. While the global economy may shrink by up to 5.2 percent in 2020, recent U.S. Census data shows that 67,160 applications were filed to set up new companies in the last week of May 2020. That’s a 21 percent increase from the same seven-day period in 2019.
Good entrepreneurs use the hidden opportunity of recession times to supplement their income or launch a new venture for a variety of reasons.
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Here, we’ll examine why recessions can be such a good time to explore your entrepreneurial interests:
There’s opportunity in the short-term market
First and foremost, a recession may force change. It’s an unfortunate reality that recessions often contribute to high unemployment numbers or reduced working hours. Whether you lost a job or had your hours cut, a recession may give you more free time than anticipated.
When that happens, unless you have an unusually large savings account, it’s time to get creative and independent. By sheer necessity, recessions force entrepreneurs to evaluate what they do well and how they can monetize their skills.
Fortunately, most businesses are simultaneously looking at cost-cutting measures. Although recessions often harm the consulting market, for example, there’s evidence that they improve short-term labor markets. With more contract jobs available, you can turn your creative or technical skills into short-term jobs to help pay the bills. Then, what starts as a side hustle may evolve into a fully-fledged business.
There’s more innovation opportunity
Recessions both expose existing economic problems and create new issues specific to that downturn. Because companies typically tighten spending during recessions, innovation from the top is generally low. The corporate leaders that we tend to look to for solutions and improvements in the market aren’t always the problem-solvers we need during recession times. During recessions, large businesses typically strive to avoid contracting significantly. As such, they lean into their core business and cut costs rather than pursue innovation and new growth opportunities.
This void presents opportunities for individuals and startups to step in.
As recessions carry on, they highlight certain needs or pain points that people experience. In the past, that’s been the price of cotton going up, making clothes expensive. Presently, global trade has slowed, leading to a shortage of spices. Recessions create problems, and when people don’t have a readily available solution, they’ll try just about anything that might work.
Recessions give entrepreneurs the opportunity to identify needs in the marketplace and create innovative solutions.
Analyzing how consumers handle specific problems, who provides the existing best answer currently, and creating your own, better solution is a microcosm of the American Dream. Executing this vision is easier in a recession, because people are more eager to find solutions to regain some semblance of their normal lives.
Overhead is low
Startup businesses and side hustles tend to be nimble with lower overhead than larger companies. That means you can likely also undercut competitors. During recessions, people are often looking for cheaper alternatives to the products and services they normally use. As a new business, your overhead is low, and thus, you’re likely in a position to offer that alternative.
Additionally, weak economic growth often leads to failing businesses selling off assets. If you need specific materials or technology to start your side hustle, a recession may be the perfect time to get them at a wholesale price. Office space is likely less expensive and you’re more likely to get deals on purchases like office furniture, or computers from vendors who are looking to move inventory rather than pay to store it. Additionally, as the COVID-19 pandemic illuminated, remote work is a viable, budget-friendly option for startups and individuals starting side hustles. Even labor, should you need it, may come cheaper than in boom times, as people need work.
When you operate with low overhead and offer your services at a more competitive price, you just might steal customers from more expensive competitors for good.
They offer better investment opportunities
Not only do things cost less, but recessions often lead central banks to drop interest rates to keep consumer spending high. That makes government-backed business loans from the Small Business Administration (SBA) particularly attractive. Lower-interest loans encourage consumers and businesses alike to borrow and spend.
Because recessionary environments also make it more difficult for lenders to assess repayment ability, however, you’ll need good credit to access those lower-interest loans.
If you need more significant funding for equipment or office space, individual investors are also very active during recessions. Angel investors, in particular, like to take advantage of down times to get their money out of the stock market and into ventures with promise. That may not be applicable if you’re just starting a side hustle, but if you’re looking to expand your business, it’s worth knowing.
Regardless of your side hustle, every business idea requires a little startup capital. During recessions, it’s often easier to find that capital for lower interest rates.
They build good habits
If you’ve never run a business or started a side hustle before, that can actually be an asset when starting one during a recession. When you’re not married to any business philosophy or mission statement, you’re free to create as you please and develop the strategies that work for you.
We just discussed how low overhead can help your business get off the ground, but there’s a more abstract benefit, too. In tough economic times, you can’t be extravagant with spending. When you get accustomed to looking for the best deals on business materials, offering the best price in the market, and doing your best work in the few hours you have available, you develop very good habits. Those habits will be beneficial when the economy bounces back and you can raise prices or expand your services.
A recession forces you to think both short- and long-term. When you launch during an economic crisis, you must be mindful every day of how customers are willing to spend, how much you can invest in your side hustle, and how to balance your new side hustle or business with your day job. Combined with lean operations, this active planning gets you in the habit of looking to the future and ensures you’re regularly adjusting your strategy based on future projections.
If you can grow your business or side hustle in bad times, you’ll have the knowhow and skills to grow it in good times, too.
The bottom line: Why recessions are a good time to start a side hustle
Hopefully you aren’t thinking about starting a side hustle out of necessity. But if you have to find a way to make ends meet, you’ll be happy to know that recessions are actually great times to start businesses or side hustles. Half of the Fortune 500 companies were started during recessions. Between low startup costs, cheap credit, and an abundance of short-term work available, they’re great times to launch almost any new entrepreneurial venture.