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Starting a Business in a Bad Economy

Starting a business always takes guts. The decision to start a business requires the entrepreneur to act courageously, to think clearly and to take risks.

Starting a business in a recession requires double doses of courage, clear thinking and risk taking.

Fortunately, small business entrepreneurs can use four simple tips to think and plan more clearly in a recession:

Starting a Business Tip #1: Avoid Dated Business Opportunities

Some of the business opportunities that worked in the sub-prime mortgage economy don't work well or probably don't work well anymore. Be sure you consider this possibility as you plan.

Some of the "dated" opportunities are obvious, of course. Unless you've been living in a cave for the last year or two, you know that a sub-prime mortgage company is not a business that's going to work anymore. You may know that the investment banking business in some senses doesn't really exist anymore.

Now these two examples of "dated" business opportunities may be obvious. But very probably, other "dated" business opportunities also exist. Accordingly, don't assume that because some business opportunity has worked in the past, the business opportunity will continue to work in the future.

The landscape has changed. And "dated" business opportunities may have worked wonderfully only because the economy was frothy or because credit was easy or because of some other reason specific to the industry or times.

Starting a Business Tip #2: Avoid Businesses that Require Leverage

During the recent easy credit days, with only a bit of finagling, you could borrow money to buy all sorts of things you could not really afford.

You could, for example, buy a house even though you had no down payment, assets or verifiable income. And you could buy a business even though you actually had no liquid capital to invest or industry experience.

Easy credit meant that lots of business and investment opportunities existed mostly because of financial leverage. One could simply borrow capital from someone else. If you could borrow money for 6% and reinvest those funds in some venture earning 12%, you looked like a financial genius.

You probably want to avoid these sorts of "financial leverage based" opportunities. For one thing, lenders (thankfully) show more caution today than they did a few years ago. For another thing, the good business opportunities based largely on financial leverage may be mostly picked over.

And a final important point: In retrospect, the people using financial leverage weren't as smart as they thought. Leverage didn't work once the economy softened.

Starting a Business Tip #3: Recognize & Exploit Great Bargains

With all the economic doom and gloom, one can perhaps be forgiven for feeling pessimistic about starting a small business. But none of us want to forget that wonderful opportunities and bargains exist for small businesses simply because of the recession.

For example, small businesses may be able to hire great people who would in a strong economy work instead for some big company. Think, for a moment, about all the super-smart, talented people who used to work for one of the now defunct mortgage lenders, home builders or investment banks.

Or think about customers who still desperately need some product, but now find themselves scrambling because a major supplier went toes up.

And think about leasing space or negotiating with key vendors when the economy is crummy.

You'll probably never get as good a price on office space, fixtures or equipment as you will when times are tough.

Starting a Business Tip #4: Think Beyond the Recession

A final important point: Even if the current recession lasts for years, the current recession will still eventually end. At some point, the economy will shake-off the credit-crisis hangover. And one obviously wants a business that will still work when times get good again.

About the author:

CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.