Can you recession-proof your startup?

The economy is an unpredictable beast from time to time.

When inflation happens, prices go up and this can drastically impact small businesses, especially startups. A situation like this can make obtaining a loan very difficult and paying off debts a challenge. 

A recession can also make it harder to retain your customer base and could result in clients missing payments.

But while a recession can make life difficult for a startup, some would argue that it's actually the perfect time to launch a new business. 

While it may not be possible to completely safeguard your startup against the negative consequences of a recession, there are steps you can take to do your very best. 

Four steps to protect your startup

1. Think about capital ahead of time

It’s a good idea to have a cash reserve wherever possible. This could mean looking for financing options that you can use as a comfort blanket when a recession occurs. Unless you're bootstrapping your business, of course.

This is known as ‘flexible capital’ and it’s a great way to give yourself a little breathing space for if the unexpected happens. 

It’s far harder to acquire any type of capital during a recession, so beforehand, do your best to line your account. Having cash reserves and other financing options to fall back on once a recession hits is a great tool to stay afloat.

That being said, you'd be wise to not acquire more than you need.

Alternatively, it may be a case of tightening your purse strings and identifying where you can cut costs.

But while preserving cash is a priority, don't let employees pay the price. Losing a key member of the team at such a critical point in your company's life cycle can have disastrous consequences.

However, there are ways to reward your team that don't cost the earth.

For example, increasingly, UK companies are opting for an employee share scheme as a cost-effective, tax-savvy alternative to a salary increase or cash bonus, in a bid to retain talent.

Download our free guide to learn more about share schemes.

2. Communicate effectively

You won’t know how hard it’s going to hit exactly, but you'll know when a recession is likely. That means you have a window of opportunity to communicate with your partners and suppliers beforehand.

Before a recession hits, there is a huge amount of anxiety and uncertainty in the air. You can do your best to alleviate some of that by discussing problems that may occur and helping to cast aside their doubts.

That doesn’t mean agreeing to things you can’t fulfil, but a little positivity goes a long way.

Of course, it’s very likely that the businesses you work alongside also have potential problems looming and being open and honest about the situation means you’re all on the same page. And if you need to seek out new suppliers, it’s best to know sooner, rather than later. 

3. Avoid huge investments at this time

It’s very likely that you want to grow your business, but this is not the time to go for huge investments and purchases. There is a time and place for risks and this isn’t it. 

If you can, it might be wise to put off larger purchases or long-term commitments until the situation improves or until you can see a big change on the horizon. 

Sometimes, the thing you’re considering buying you can actually do without. It's worth reviewing your current team's tech stack to see if you're really making the most of what you've got.

4. Outsourcing

If you're not in a position to hire full-time, in-house roles, consider looking at flexible arrangements. You could outsource projects to a freelancer, consultant or contractor, for example (if the price is right and it's a great fit).

By doing this, you can build positive professional relationships with talented individuals without necessarily committing to long contracts.

During and after the pandemic, many experts went on to pursue their passions as freelancers or consultants, so there's a wealth of talent to choose from.

Key takeaways

It’s tempting to push forward and prioritise growth, especially when things are going well. But the truth is that excessive spending and risk-taking during a recession is a double risk in itself.

While it’s impossible to completely guard against anything going wrong, some careful consideration, investigation and planning now, can help protect your business later.

And if you want to explore share schemes further, go ahead and talk to one of our equity experts to learn more.