Starting A Business In A Recession
Today's entrepreneurs are facing both positive and negative financial pressures in the current economic climate.
Pessimists might argue that now is an unsuitable time to start a business with the UK currently in recession. However, it can also be argued that, for brave entrepreneurs, the business opportunities offered by the current economic climate have rarely been so tempting.
Certainly, today's entrepreneurs are dealing with very unusual financial circumstances. A global credit crisis of unprecedented scale has led to a similarly outsized policy response from UK authorities. Economists are deeply divided on whether there will be a quick recovery from the financial downturn, or whether we are facing a "double dip" recession
of unparalleled destructiveness.
The future performance of the economy is obviously a crucial concern for people looking to start a business at the moment. After all, strong future economic growth is likely to make the initial success of a good business start-up still more pronounced.
The Negatives
Looking at the current economic situation, the prospects seem bleak for starting a business. UK GDP has declined for six straight quarters, falling by another 0.4 per cent over the third quarter of 2009. In a bid to counteract the worst effects of the credit crunch, the government is also spending much more than it receives in tax and other revenues, with latest public finance figures showing an additional deficit of £11.3 billion built up over September 2009. The public finances are estimated to move over £175 billion into the red during 2009.
For the consumer and the small business owner, these big deficits are bad news - as the government is likely to cut spending and raise taxes in the future as it attempts to pay these debts off. After all, an increased tax burden tends to be bad news for businesses - especially start-ups who have yet to build up a customer base and are dependent on borrowed money as they try to get off the ground.
Moreover, the decisions on tax taken recently by the government look ominous. It has already been announced that people earning over £150,000 per year will pay 50p in the pound in income tax from next April, up from the current level of 40p. Meanwhile, VAT will revert back to 17.5 per cent from 15 per cent from January 2010.
Future tax increases affecting small business owners are also very possible. A report released earlier this month by the National Institute of Economic and Social Research suggested that income tax for basic rate payers should rise from 20p to 27p in the pound and that the number of items covered by VAT could be increased, as the government attempts to repay its debts.
Another factor affecting the success prospects of a new small business is the fact that many people are likely to feel poorer than before as a result of the recession - lessening the likelihood that they will spend on the goods and services provided by firms. Unemployment is on the rise, meaning less consumer spending over the long term; the UK's jobless total is at a 14-year high of almost 2.5 million. Moreover, young people - tomorrow's consumers - have been hit particularly hard by the downturn, with 39 per cent of unemployed 16 to 24-year-olds having been out of work for six months or more.
Therefore, business face a "double whammy" of financial pressures: the likelihood that taxes will increase in future and the predicted long-term malaise in consumer demand.
The Positives
It is a testament to the strength of the British entrepreneurial spirit that, despite all this doom and gloom, sentiment among existing small business owners is bearing up well. In fact, significant plus points for starting a business in the recession should be set against the negatives detailed above.
Firstly, it seems likely that economic conditions are now improving. A poll from accountants PricewaterhouseCoopers revealed recently that three in four privately-owned British companies believe that the recession is already past its worst point. Two in three also expect an improvement in business conditions over the two years to come. Unsurprisingly, this confidence was counterbalanced by a sceptical attitude over the current British tax regime. Only one in three said that they believed the current rules "encourages enterprise".
The Consumer Confidence Index from Nationwide, which measures people's opinions on various aspects of the economy, has skewed positive over recent months. September's Index rose by six points, and 39 per cent of people asked by the building society expected the economy to improve within six months.
Meanwhile, the Distributive Trades Survey from the Confederation of British Industry (CBI) stated that eight per cent more retailers experienced a rise, rather than a fall, in sales during October - and 19 per cent more retailers predicted a further increase for November, the most positive finding on this question since the summer of 2007.
While the tax climate might be about to get harsher, there's no doubt that the UK is a good place to do business in by global standards. Figures released by Legatum this week even showed that Britain ranked second in the world for "innovation", which suggests that the general economic environment is unusually conducive to new ideas.
Your Next Step
The first thing many budding entrepreneurs do if they decide to take the plunge and start their own business is to go to the bank manager to ask for credit. While lending conditions remain tight, there is some evidence that firms are attempting to ease conditions for businesses. RBS/NatWest recently announced the launch of a telephone hotline and email service aimed at helping business owners find a "responsible lending solution" by putting them in touch with relationship bankers. However, data from the Federation of Small Businesses shows that around one in three small firms are still struggling to get loans and overdrafts at the moment.
Friends and family remain an option for business owners in need of finance, while charities such as the Prince's Trust can provide help for young entrepreneurs. Several government schemes have also been launched for this purpose. One example is Flying Start, tailored specifically for graduates. The programme has recently received an extra £1 million investment, which will allow 5,000 more graduates to attend events in which they are given guidance in starting their own business.
Dragons' Den star Peter Jones could also help matters with the launch of his National Enterprise Academy. The institution, backed by £8 million of government funding, aims to provide backing and guidance for entrepreneurs, offering learning programmes on business matters.
But, ultimately, you're on your own. The best thing and the worst thing about being your own boss is that your business fails - or succeeds - on your own terms.
Most small businesses will face hardships in the first few months after start-up. But it's worth remembering that the rewards of launching a successful venture can be huge. After all, Jack Cohen started Tesco in the east end of London in 1919 with an initial investment of £1. And now, the firm takes in £1 of every £8 spent in the UK retail sector.
How we can help
It is much easier to avoid making mistakes, and to maximise your future chances of success, if pre-launch planning is undertaken with professional help.
We would be delighted to assist with the preparation of a business plan, and to help you choose the best business structure for your business.
Help and Advice
Contact us now so we can discuss your requirements; call us on: 0800 0523 555 Or fill in our Contact form and we will call you back.
