Starting a business in a downturn

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Many frustrated job hunters are throwing up their hands in despair and saying, “Maybe I should just start my own business.”

That last resort may be a great idea.

“Many people think (a downturn) is the wrong time to start a business, but that’s not always correct,” says Edward D. Hess, professor of business administration at the University of Virginia and co-author of “So, You Want to Start a Business? 8 Steps to Take Before Making the Leap.”

Don’t despair over the news about the bad economy. Plenty of companies started during bad times, including General Electric, Walt Disney, Microsoft and Google. These behemoths were originally started by a few people wondering how to turn a concept into a business.

Here are some tips to help you overcome today’s economic obstacles and join these successful ventures.

Do you have what it takes?

According to the Small Business Administration, or SBA, interest in entrepreneurship has spiked, with a 32 percent increase in the number of visits to its website so far this year compared to the same time last year. Before you create that business letterhead, make sure you’re cut out to run a business. While entrepreneurship is a great way to work at something you love, it also can be marked by long hours and uncertain paychecks.

“The biggest question to ask yourself is, ‘Can I really commit to doing this?'” says Amy Cosper, editor in chief of Entrepreneur magazine. “Running a business is all-consuming, so you must be honest and determine whether you’ve got the business plan, the money, the mettle and your family’s support.”

You also need structure and discipline, says Mark Volchek, co-founder of Higher One, a company in New Haven, Conn., that creates online banking tools for college students. He started the company as a college student a dozen years ago, just as the dot-com bubble popped.

“You need to be motivated to work independently. When you’re employed, you’re given an agenda and guidance but when working for yourself, you must be well-organized,” Volchek says.

A good first step is to sign up for small-business training and counseling. The SBA offers courses nationwide through its centers and other business partners, teaching accounting, tax rules, customer service and public relations. You also can assess your skills beforehand with its readiness assessment tool and online training courses.

A second stop on the entrepreneur-training route is FastTrac, a program financed by the Kauffman Foundation that offers sessions in more than 300 locations nationwide. Like the SBA, FastTrac has revamped courses to help entrepreneurs withstand the downturn by teaching them survival skills like creating a solid business plan, understanding market needs and bootstrapping a startup.

“(There’s) less of a casual attitude of people coming into our program now,” says Monica Doss, FastTrac program director. “They want to see if their idea works, then run with it.”

What can you offer?

First, not every sector is poised for new growth. For example, starting an upscale restaurant or high-fashion boutique is probably a bad idea now. But there are growing sectors. “Try making a product or solving a problem specifically for a generation like the boomers or the millenials,” Cosper says. Other emerging areas are green energy, video games, fitness and health.

For many, though, it’s better to stick with an area they already know. “Now is the time to leverage your knowledge. It’s not the time to learn an area you know nothing about. You must have work experience in that industry and know who the suppliers and customers are,” Hess says.

That’s how Michael Nusimow, a former software engineer for Bloomberg News in New York, started his company. He kept missing his dentist appointments and wondered why his dentist failed to remind him. He checked the dentist’s software system and found it “truly awful.” But a light bulb went off and in January 2009, he resigned and started, which creates Web-based tools for doctors to manage appointments and billing.

“People thought I was crazy, but I had the passion to run my own business,” says Nusimow. “Also, the software idea was relevant and … could have a big impact.”

Also important to Hess is what he calls the value proposition. “You need to decide why someone is going to buy what you have to sell. You must have a message to customers about why you’ll be better, faster or cheaper than the competition,” Hess says.

It’s easy to do research online, but what will give you a competitive advantage is talking to potential customers, suppliers and vendors directly, says Volchek. For Higher One’s banking products, he went to university administrators and asked them about their problems and procedures.

Once you’ve got the idea, create a business plan. Two pitfalls of writing a plan are overestimating sales and underestimating expenses. Nothing could be worse in a downturn. “We tell FastTrac students that it takes twice as long to break even than they think, so they should basically multiply their startup costs by two,” Doss says.

Where’s the money coming from?

To be sure, insufficient capital is the reason why most companies fail. Startups with $50,000 or more in capital have a better chance of keeping their doors open than those that don’t, the SBA says.

For small businesses of any age or size, the SBA offers three types of loan programs. Its website also offers a good search site for finding business loans, grants and financing programs that you may be eligible for.

On the venture capital side, formerly free-spending firms are tight-fisted these days. If they are investing, their money is going toward software and medical devices and less into other businesses. Instead of raising $3.5 million from venture firms, Volchek and his partners started instead with $600,000 from friends and family.

“Raising money that way makes you more disciplined and resilient financially,” he says.

Volchek recommends raising small amounts from individual investors, so the risk is spread among many people. That will make them more willing to invest. Offer them stock in exchange.

And when it comes to a loan, community banks are a better alternative to large lenders, which have been slow to part with cash since the financial meltdown, Entrepreneur’s Cosper says. “If you’re in Decatur, Ill., the banks there know the culture, the region and economic conditions you’ll be working in much better than a bank headquartered in New York,” she says.

Regardless of the capital you raise, be frugal with your spending. Plan on your cash lasting at least six months. Don’t take on any new debt, and stay away from credit cards to finance your business.

How will you get the word out?

Many businesses see marketing as a luxury when money is tight, but this is the time you need marketing most.

The Internet has been largely unaffected by the downturn and is still an easy and inexpensive way to market. “Our college-age customers mostly communicate electronically anyway, so Higher One uses mobile marketing, which is low cost,” Volchek says.

Facebook is becoming an integral marketing tool, Cosper says. “Every company, from Visa to the corner bar, is creating its own Facebook page to promote (itself),” she says.

And though businesses are on Facebook to connect with their customers and fans, keeping them interested and engaged to keep them coming back for more is the challenge.

Besides updating a Facebook fan page, there are different approaches some businesses take, such as running contests and sweepstakes, to grow their reach and increase follower acquisition.

The same approaches can be used with Twitter. Many companies will do a cross-promotion on both social networks to increase their fan base simultaneously. Besides just the two main social network sites and their offerings, there are many app sites, free and paid, which small-business owners can take advantage of when wanting to stay on the minds of their potential customers.

There are also viral marketing methods, such as creating a video on YouTube and e-mailing it to others.

“These are amazing marketing tools, but you must have a clear message,” Cosper says.

How will you come out ahead?

There are a few benefits to a lousy economy. For one, you’re likely to find that suppliers are more willing to negotiate a lower price.

“During bad times, you can lock in good, long-term deals for office space, technology and other services. When it’s time to renew, you can still negotiate and have the advantage,” Volchek says.

And in financing himself, Nusimow has found other ways to keep costs low, such as renting a desk in a shared office with a receptionist and conference room for $400 per month rather than having a separate operation.

Also, you have greater hiring selection in bad times. With vast layoffs in many industries, you have more choices at all levels, from graduates entering the work force to seasoned management.

A simple want ad on or could generate hundreds of resumes. To get seasoned workers, consider offering them part ownership, or shares in the company, so they have a stake in the business. And an internship is an inexpensive way to evaluate talent at a time when more college grads and young workers are willing to work for free to prove their worth in a tough job market.

“When you start on a shoestring, you learn all sorts of ways to run a business efficiently,” Doss says. “By bootstrapping, the lessons you learn along the way will serve you well among your competition when the economy gets better.”

Read more about starting a business in Bankrate’s Small Business Guide.