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Making A Business In A Recession: Make Your Mark

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

With many people out of a job or even just trying to make a mark on the world, some people are trying to find other sources of income. And people are thinking of making a business in a recession. It may be a scary time to try to make a business. However, I like to believe that people are strongest when they feel trapped. People tend to blaze a path if the obvious path is blocked.

Important Notice

If you are currently out of a job, while making a business in a recession may not be a bad idea and even exciting, you need a job. There are still plenty of jobs in sales right now. In addition to providing you with income, working at these jobs will provide you with the skills required to be an entrepreneur including persistence. That is why salespeople tend to make the best entrepreneurs. My word of advice, if you cannot sell for someone else for a stable salary, you certainly cannot sell anything for yourself with your capital on the line.

Even if the job is at a grocery store, that would be good. Think of it as a job selling groceries. Frankly, groceries are an easy sell. It is sustenance and I know for a fact some people are running low on ingredients with some shelves being empty. If you have stable income (or at least fairly stable), you can then try your hands at making a business in a recession.

Pros

Demand Bubbles

Businesses close during a recession. Demand bubbles start to form. That demand can easily be captured by a new business. Take restaurants for instance. Recessions tend to hit hard at restaurants, with everything going on today, even harder. Making a restaurant during or after a recession could provide you with customers you would not have had before. Most businesses would work in a very similar way.

Innovation

Recessions are never simply about money disappearing, there are many reasons recessions happen. There could be unsecured assets, a Y2K scare, or pandemics coupled with lockdowns that slow down economies. But the core cause is always fear. Customers may be afraid of spending money on certain things or maybe even afraid to spend money in certain places. You should try to find ways to innovate and make people feel comfortable spending their money on your innovation.

Consider restaurants. At least for right now, I think one of the worst businesses you could try to open up right now is a traditional restaurant. Traditional is the key word meaning brick and mortar, sit down areas, and waiters. A spot purely built for food delivery would fare better than a traditional restaurant. In fact, maybe people would be excited to try something new from their typical delivery options. Also, online gourmet cooking classes and other food businesses that do not use the brick and mortar foundation may thrive with other brick and mortar restaurants shut down. Who knows maybe your food service idea someone may call “stupid” may be the next best thing.

Easier Start Up Costs

Next to no recession in the history of the US ever led to a raise of interest rates. We were already close to 0% interest rates, I have heard rumors that they are now 0%. With the possibility of a housing crash in addition to everything else I would not be the least bit surprised if the US starts putting the minus sign right before the interest rate (although I hope not). If that happens, you may be paid to borrow money for your business.

Certain Sectors May Thrive

I have previously posted about investments that tend to do well during a recession. Many of these sectors are in constant demand. All I hear investors talk about is investing in health care. Healthcare investments are usually stable because healthcare is usually in constant demand. Depending on the cause of the recession, healthcare may be in even higher demand (my attempt at humor during troubling times).

You know what else is in high demand? Toilet paper. Personal hygiene products. They are in such high demand distillers are now making hand sanitizer. And everyone has either a tower of toilet paper in the US, or has looked up what makes good substitutes for toilet paper. It got so bad when me and the missus went to the store a little over a month ago this happened.

Grocery Store Story

Stranger walks up to me: “Sir, do you know where the toilet paper is?”

Me: “Gone.”

Stranger: “I need toilet paper.”

Me: [Point down toilet paper aisle (or lack there of)] “So did everyone else.”

Stranger: “What do I do?”

Me: “Well, there are paper towels.” (Something you should never flush down a toilet, apparently the stranger knew that).

Stranger: “But I don’t want to use paper towels.”

(Important and maybe even legal notice: DO NOT USE ALUMINUM FOIL!)

Me: “The next thing over is aluminum foil [raised eyebrows].”

Seriously, the next thing over in the aisle was aluminum foil. I couldn’t have written a better joke if I tried. And despite the world being in chaos, the world puts a few things in order to create comic gold. But seriously I am joking. First, toilet paper is available the last few weeks I checked, buy it, use it, like it, and try not to run out again. Second, DO NOT USE ALUMINUM FOIL! I feel like with everything happening today we should emphasize when we are joking or “being sarcastic.”

This crisis has shown us that somethings just cannot be substituted, especially if the best substitution for toilet paper is to take a shower. My eccentric little brother was right. That is what scares me the most in this crisis.

Other Thriving Sectors

With little to do, technology is keeping us all entertained and/or connected. Netflix is helping people cope with staying inside, Microsoft is providing gaming, and Amazon is providing us with supplies. Seriously, I have not heard of Zoom before this crisis. Now it is the only stock talked about more than healthcare. If you need motivation of how well businesses can do during a recession just look at Zoom.

Cons

Certain Sectors May Suffer

There are many sectors in the economy that do not thrive during a recession. These include food service and travel. I believe that everyone reading this is smart enough to know that already and I will move on. Especially since there are some sectors that may not thrive during this recession like they did in previous ones.

Discount Retailers

Admittedly, when I wrote about sectors that may thrive during a recession, the information I provided did not take a pandemic driven recession into account. With some policies changed due to the pandemic, some of these sectors may not be good sectors to enter. For instance, discount retail may not be a good idea, at least not the brick and mortar ones. Unless you can develop a discount eCommerce platform this would not be a good sector to enter right now. While I could see an discount eCommerce retail platform being made, I think there is a good reason discount retailers are moving away from eCommerce. They had very little revenue from eCommerce and I imagine the upkeep of eCommerce may exceed that revenue.

Note: this is not supposed to be discouragement, but a challenge. If you want to go into this, try to find a way to minimize the upkeep costs of such an idea, you may be onto something revolutionary.

Defense

Another “recession-proof investment” I believe may not fare well during this crisis is defense. The $2.2 trillion care package delivered is almost half of the US 2020 budget, one I believe is worth mentioning was already expected to create an almost $1 trillion deficit. It is a decent bet that the US government will re-evaluate their spending. With over half of the US discretionary spending (not including social security, medicare, and other mandatory spending) being in the military I think there is a chance that military spending may be cut. However, the US rarely had an issue increasing spending deficits.

Some defense businesses may change. I would not be surprised if some of these defense companies start looking more into technology that look more into automation and intelligence, especially if they believe it will help with monitoring outbreaks.

Not Much Money Available

While making a business during a recession may be a good idea there is always a downside. People are spending less money. They may be less likely to part with their money, especially to a new business. That will not be an issue for you if you provide customers with a good product and make a good sell. After that you will have more customers ready to buy your products.

More Competition

If people are out of a job they may try to find new sources of income including businesses, especially online. I have seen GoDaddy and many domain providers advertise for people to form online businesses during this crisis and I imagine that many have (I could not find any statistic on this). So now I have more competition as a blogger.

The same works across other businesses and business platforms. You will not be the only one looking for some extra income while making a business in a recession.

Final Thoughts

While making a business in a recession may be a good idea a better idea is to make a business before a recession and modify it during the recession to make your mark. If you look at many businesses including Netflix and Microsoft, you will see that their periods of massive growth happened during recessions. That is because recessions are just part of the economic cycle to provide people and markets with innovation and to cut off the parts that are lagging. It is like Paul Romer, a famous economist, said: “a crisis is a terrible thing to waste.” Recessions are not times known so much of pain, but of perseverance. They are known as the times where people who write history make their mark. The hammer of a recession will either break you, or forge your wealth.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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