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A recession is an excellent time to launch a small business. Larger companies rein in their advertising and expansion plans when the economy slows, making it easier for new companies to get noticed and capture market share.

Newer, small companies also tend to have lower fixed expenses than older, larger ones -- and that allows them to underbid their competition. That’s very important during a recession, when customers are particularly price-sensitive.

The trouble is that starting a new business is risky. Sinking all of your savings into a start-up or taking out a small business loan could leave you in a deep financial hole if the business fails.

There’s no way to eliminate all the risk from entrepreneurship, but you can greatly reduce your downside if you keep your business’s expenses to a minimum. Here’s how to launch a business for less than $5,000...

THINK SERVICE

The service sector offers the best opportunities for low-cost business start-ups. Unlike retail or manufacturing businesses, service-sector companies...

Rarely require major up-front outlays of cash for inventory or materials.

Often can be run out of the home, eliminating the need to rent an office, factory or storefront.

Tend to be local, so there’s no need for expensive nationwide marketing campaigns.

Four ways to come up with a low-cost service business idea...

Keep lists of the things that frustrate you and the things that you wish you didn’t have to do for yourself. Consider both your personal life and your previous professional career. Perhaps other people would pay you to help them avoid these annoyances.

Example: Two brothers in Irvine, California, were frustrated that it took them much of their lunch hour to get from the local business district to area restaurants for lunch. They started Restaurants on the Run, a service that delivers restaurant food to office workers at their desks. The company has expanded into multiple cities and now does millions of dollars in business each year.

Find out which service-oriented businesses (and other low-cost businesses) are thriving in big cities. Trends tend to begin in big coastal cities, such as New York and Los Angeles, and only later work their way to the rest of the country. Read the business and lifestyle sections of magazines and newspapers from major coastal cities to find out what new business ideas are thriving there. Consider whether similar businesses would be successful in your region.

Examples: Frozen yogurt franchises and bakeries specializing in high-end cupcakes are among this year’s hot new businesses in large, trendsetting cities. Buying a franchise or opening a bakery would not be cheap, but perhaps you could inexpensively open a street-corner dessert cart selling comparable frozen yogurt treats... or bake premium cupcakes at home and sell them through area stores or restaurants.

Target a growing demographic. Open a business that serves a rapidly expanding demographic, and the odds of success are in your favor. Currently the fastest-growing demographics are seniors and children. (Make sure these national trends apply to your local region before launching your business.)

Examples: Potential service businesses that cater to seniors include transportation services... shopping and grocery delivery services...adult day-care services... and senior “transitional” services, handling the details involved in moving to a nursing home or assisted-living facility. Service businesses catering to the youth market include day care... transportation services... tutoring... college-prep classes... and college-application assistance.

Search for service opportunities related to your professional experience. If your new business is in a field that you already know well, your learning curve will be shorter and your Rolodex will already be full of potential customers and other useful contacts. Make sure that your new business does not violate any noncompete agreements that you might have signed with former employers.

AVOID UNNECESSARY COSTS

Start-up expenses that your business can live without...

Renting an office. Work from your home if at all possible. Meet with potential clients and other business contacts in their offices... at the local coffeehouse... or in the lobby of a hotel.

Buying office furniture and business equipment. Try to make do with the furniture, phones and computers you already own. If you must purchase business furniture or equipment, search for used items. One advantage of starting a business in a recession is that other companies are going out of business and selling off their business furniture and equipment at low prices.

Expensive marketing efforts, such as direct mail and television ads. Their high cost makes them too risky for your start-up.

Helpful: Turn your customers into your marketing team. Tell them you’ll give them a good discount on their next order if they refer another customer to you and it leads to a sale.

FOUR EXPENSES WORTH PAYING

Not all start-up expenses should be avoided. Do try to do the following...

Incorporate your business. A lawyer might charge about $2,000 to help you set up a Limited Liability Company (LLC) or corporation, but it’s money well spent. If your business is not an LLC or a corporation, your personal assets could be at risk in a lawsuit.

Launch a Web site. A Web site does not need to be elaborate, but it must look professional. This is particularly important if your company doesn’t have an office or a long track record. To learn more about how to start a Web site for your business, go towww.allbusiness.com and type “Web site” into the search window.

Arrange for health insurance. Obtaining health insurance at a reasonable price can be a major problem for those who are self-employed. Find out if you are eligible for COBRA benefits from your last job or if you can get coverage through your spouse’s health insurance plan. If you are past your 50th birthday, you should be eligible for health insurance through AARP (888-OUR-AARP, www.aarp.org). Or find out if a health insurance plan is offered by a trade association that your business makes you eligible to join.

Buy Business Plan Pro. If you don’t have experience writing business plans, this software is the cheapest, easiest way to do so. (Palo Alto Software, $99.95, 800-229-7526,www.bplans.com.)

Business plans are like road maps. They help you lay out your route to get from where you are to where you want to be. Good business-plan software prompts you to think about factors such as competition, pricing, staffing and marketing.