Starting a Business in a Downturn — Crazy or Genius?
By Catherine Clifford October 5, 2011: 2:06 PM ET
NEW YORK (CNNMoney) — This year was tough for small business and next year doesn’t look much better.
Sound like a crazy time to launch a business? Not necessarily. For bootstrapping entrepreneurs who do their homework, 2012 could spell opportunity.
Indeed. Some of the country’s most successful companies got their start when the economy was flat on its back.
When Thomas Edison opened his lab in 1876 and produced the first light bulb in 1879, it was right smack dab in the middle of a recession. His company eventually became multinational conglomerate General Electric. (GE, Fortune 500)
“Necessity is the mother of invention — it is absolutely true,” said Ted Zoller, the vice president of entrepreneurship at the Kauffman Foundation. Entrepreneurs often “are looking for resolutions to problems.”
Make no mistake — it’s rough out there: Problems are definitely plentiful. So starting a business is not for the faint of heart.
“We are really in a nadir of consumer confidence,” said Zoller. “People are not taking chances. They are not taking risks.” And they are more tight-fisted with money than ever before.
Zoller, a small business owner, knows this from personal experience. Recently at his bead shop in Chapel Hill, N.C., a customer “was quibbling over a $5 purchase,” he said. “She wanted to bargain it down.” That kind of haggling makes running the business difficult. “We have to survive here,” he said.
Lower chances of survival are exactly why next year is not a good time to launch a business, said William Dunkelberg, the chief economist at the National Federation of Independent Business. Sales are slow for the established companies and just staying open is becoming a problem, he noted.
In 2005, the number of firms that were born outpaced the number of businesses that closed by about 80,000, according to the Department of Commerce‘s Census Bureau.
But by 2009, the number of firms that were being shuttered outpaced the number of companies being born by about 90,000.
“For the most part, there are too many firms, like there are too many houses,” said Dunkelberg. “Like there are too many of a lot of things.”
The hunt for capital: Capital will continue to be scarce.
The credit markets of 2011 are expected to be just as tight next year. And most lending to small businesses will come from community banks, which are already doing the lion’s share, said Ami Kassar, CEO of Philadelphia-based MultiFunding, a loan brokerage for small businesses.
Getting loans will not be a walk in the park. New entrepreneurs will have to be a lot further along with their business plans to get startup capital, experts said.
“They have to prove themselves, prove the revenue stream, get something going,” said Zoller of the Kauffman Foundation. “I think you will see a much higher frequency of ventures being started with little to no capital.”
Those who do get capital will most likely get it from alternative sources, such as friends, family and credit cards, said Ken Yancey, the CEO of SCORE, a nonprofit association, who does not recommend using plastic.
“It is an awesome time to start a business,” said Kassar. “But you really have to bootstrap it, be creative.”
A silver lining: Starting at the bottom does have its advantages. There is only one way to go — up.
“I really don’t think things are going to get a lot worse than they are now. If at all, things are only going to go up,” said Todd McCracken, president and CEO of the National Small Business Association.
If the economy does start to show signs of life, business owners who launch in 2012 “will be in on the ground floor,” he said. “They will look back in 10 years and be glad they started in 2012.”
But it’s important to be prepared, said Yancey of SCORE. Jumping in the deep end and hoping things will work out is not the smartest approach, experts said.
CNNMoney agrees, which is why we are launching the ultimate startup guide, a series of articles to help entrepreneurs weather the challenges of 2012. Check out our first gallery on incubators here.
- Ted Zoller: U.S. Entrepreneurs Need A ‘True Global Mindset’ (huffingtonpost.com)
- Business tips from Recruitment Genius CEO Geoff Newman (simplybusiness.co.uk)
- Do First Things First, EzTimeSheet Employee Attendance Tracker Helps Small Business Be Productive Amid Downturn (prweb.com)