In our previous blog post Is this a Good Time to Buy a Business we argued that the difficult economic times present an excellent opportunity to start a business. There are a number of advantages and opportunities that bad economy; like current one; provides. The advantages include less competition, good talent available at reasonable salary and others.
While it is true that this is a good time to start a new business you cannot ignore the challenges that you will be facing in starting business in bad economic time. By understanding the challenges and preparing yourself to meet them head-on you will improve your success rate. Here are three most difficult challenges in our mind along with suggestions on how to overcome them.
- Access to Cash. If you have gone to the bank for loan recently you know about this challenge. The banks have practically shut their doors for small businesses as they have adopted strict lending standards. Other funding avenues such as private investors and venture funding have also been drastically reduced because of their propensity to reduce risk in difficult times.
While it is difficult to access cash these days there are ways you can overcome this challenge. One way is to provide personal guarantee and/or collateral that will soothe banks or investor’s fear of default. You can also try to access cash from your credit card; although you will be paying steep price in the form of higher interest rate. You might also want to ask friends and family members to lend a hand for a short period. - Lower Sales, Higher Expense. This is one of the primary reasons why many businesses shut their doors in challenging economic times and why it is difficult to start a new business. The customers are watching their purse strings very carefully resulting in lower sales for you; while at the same time the bills keep coming in. This can lead to a death spiral where eventually you just cannot survive.
The best approach you can take to overcome this challenge and avoid death spiral is drastically lower your costs as quickly as possible. The name of the game is survival and it is the fittest –one with lower costs – who will win the race. It is easy to reduce your variable costs. For example, you can reduce labor cost by letting go some employees and purchase cost by asking for higher discount from suppliers. At the same time, you also want to take advantage of the situation by lowering your fixed costs. I have come across many business owners who renegotiated their real estate lease before it was up for renewal by persuading the landlords to give them a break. The landlords were happy, albeit reluctantly, to do it because the other alternative would be empty building when the tenant goes out of business. - Low Employee Morale. In the downturn the employees are fearful of losing their jobs and are willing to work extra at lower salary. However, they are there just because they have to. They are constantly worried about the bills they have to pay and may not give their best to the job with other things on their minds. They will also leave for greener pasture at the first opportunity they get.
While this challenge may not be as serious as the first two; you still want to watch this. You should not make employees feel that they are being taken advantage of the situation. While you do have to watch your expenses carefully and let some employees go you should take good care of the remaining employees and reward them appropriately for their effort.
What other challenges have you come across in these difficult economic times? What have you done to overcome them? Do share it with others in the comments below.Image Courtesy: techfun
