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Why entrepreneurs should care about inflation

In 2020, everything changed for small business owners as they learned to navigate a new normal during the pandemic. Many businesses were completely shut down for months, and as the world opened back up last year, businesses were forced to cope with unprecedented labor and supply shortages. Despite the supply chain issues and shortages in raw materials, consumers were eager to get out of their homes and spend money. Entrepreneurs had to make the best use of their resources to deal with a rising demand, which led to global inflation.

Now as we wrap up 2022, people all over the world are still dealing with rising prices and declining purchasing power from the inflation effect. The National Federation of Independent Business states that inflation is currently at a 40-year high. The U.S. Central Bank, or Federal Reserve, is diligently working to combat inflation by raising the Federal Funds rate, but there is no exact science to predicting the duration of an economic downturn. The best defense for entrepreneurs is to understand how inflation is impacting their businesses and what steps they can take to protect profit margins. 

Financial planning

When fighting inflation, small business owners are forced to make some tough decisions regarding business finances. Many entrepreneurs try to avoid layoffs for long-time employees, but the effects of inflation make it difficult to keep up with wage demands. They need to consider which suppliers to move forward with and where there’s a need to explore more cost-effective options. Managers must reconsider their business plans, streamline processes, and reevaluate any growth strategies or plans of expansion. Adapting to the financial strains of inflation and making tough decisions is key to keeping operations running smoothly.

Low revenues

As inflation rates rise, consumers start to change their spending habits. The fears of increased fuel and food costs, unemployment, and diminished investment accounts cause individuals to reexamine their finances and cut back where possible. Individuals start to put off large purchases, like electronics, real estate, discretionary services, and vehicles. To prepare for the continued hardships, customers start to compare prices, and lower costs become more of a priority than previously considered. To maintain a strong customer base through inflation, small business owners must rely on customer service, creative marketing, and strategic business decisions.

Increased input costs

As if decreasing sales weren’t enough, inflation causes increased material, supply, utility, and borrowing costs for small business owners. As costs of goods increase for your vendors because of inflation and supply chain disruptions, they are forced to pass the increased costs along to their customers, which can reduce sales and put a strain on small business owners. Another rising cost during inflation may be employee wages and salaries. As inflation rates rise according to the consumer price index (CPI), employees are demanding a higher rate of pay. Some local governments even require businesses to increase staff pay during periods of high inflation. To inquire about regulations in your state, check with the Bureau of Labor Statistics.

Cash flow concerns

A combination of accounts receivable collection difficulties, increased input costs, and lost revenues put a strain on monthly cash flows. Decreased cash flows may create stress for entrepreneurs when paying themselves or covering monthly expenses, like utility costs. Since cash flow and annual revenues factor into calculating personal credit scores and affect business credit history, small business owners may also experience trouble making monthly payments on commercial real estate loans or personal loans. 

Solutions for dealing with inflation as a small business owner

Understanding that inflation will affect the money required to run a business and also the amount of money the business is capable of making is the first line of defense for entrepreneurs. Thankfully, there are several strategies business owners can implement to help survive rising inflationary rates and even the threat of a recession.

Raise prices

A recent article on Business.org shared that 89% of small businesses have had to increase their prices since COVID-19. While that is a shocking statistic, many other small businesses have delayed the act of price increases because they fear it will diminish their customer base. However, raising prices in a well-planned, strategic way can increase revenues without damaging your customer relations. Here are some tips on how to raise prices effectively:

• Timing is everything – Too many price increases may scare away customers. It is also a bad idea to raise prices at the same time as you’re cutting hours or changing service packages. Be sure to choose the right time to raise prices, following a period of steady revenues and good customer feedback.
• Don’t raise the price – Many types of businesses can achieve the same benefits of increased prices by reducing the size of their goods and services. If you are operating a service-based business, like a dental office or accounting firm, consider changing the structure of your service packages to offer fewer services or reduced hours. If you own a retail store or food or beverage business, consider reducing the size of your portions.
• Add value – Customers may accept increased rates if they feel like they’re getting more for their money. Consider adding cost-effective value items to your service packages or products. Obviously, the value adds will depend on what it is you’re selling, but consider free gift-wrapping, free consultations, electronic newsletters, or discounted delivery rates.

Reduce costs

Operating expenses increase during inflation, but small business owners are not powerless when it comes to controlling costs. There are many expenses that can be cut during periods of inflation including the following business costs:

• Office space – Examine your business model to see if there’s room to eliminate the expense of office space. Can your employees work from home, either short-term or indefinitely? Can you share office space with another business in the same industry?
• Inventory – During periods of tight cash flows, consider keeping less inventory on hand to cut back on supply costs and storage needs.
• Contracts – Reach out to vendors and contracts to inquire about negotiating your current prices. Some vendors will offer a discount if you commit to a longer contract, or some may offer bundled price packages.
• Marketing – Review the business’s current advertising budget and look for opportunities to cut marketing activities at higher costs and replace them with more cost-effective efforts to gain new customers, like email campaigns or social media engagement.

Secure capital

According to Forbes.com, you can “use a business loan to combat inflation.” As inflation rates and interest rates continue to rise, small business financing options provide established and startup entrepreneurs the opportunity to secure capital now before the value of a dollar decreases again. Taking out a small business loan with the intention of purchasing equipment, preparing to stock up on inventory, completing renovations, or consolidating other high-interest debts, like business credit cards, can increase your business’s assets. While some entrepreneurs worry that increased prices are the worst time for large purchases, the current economic situation implies that prices and interest will only continue to increase. It’s a wise financial decision to secure those fixed assets now, increasing your net assets on your balance sheet and making the most out of the current interest rates before the next round of Federal interest rate hikes.

Small business loans that can help get through inflation

Taking out a small business loan can benefit your business during high inflation in the following ways:

• Build better business credit
• Supplement fluctuating revenue cycles
• Have funds to launch a new marketing campaign
• Make repairs and renovations
• Make tax-deductible interest payments
• Tackle large purchases, like equipment and machinery

Small business financing options are a great business tool for many entrepreneurs, but with inflationary rates on the rise, there are some additional precautions borrowers should take. Make sure you are exploring loans with fixed interest rates, that will remain the same throughout the entire repayment term regardless of the Prime Rate or market trends. Some great small business loans that can help entrepreneurs handle the impact of inflation include the following.

Term loan

A term loan is a traditional type of financing where the borrower receives a lump sum of cash upfront and repays the debt over time with monthly payments of interest and principal. The loan terms for a traditional term loan depend on the lender issuing the funds and the creditworthiness of the borrower. Biz2Credit advertises small business term loans up to $500,000 with interest rates starting at 7.99%. Since Biz2Credit is an online lender, they also offer an online application process, easy approval requirements, and funding in as soon as 72 hours. Eligibility requirements vary from lender to lender, but most entrepreneurs are able to get approved for an unsecured term loan, where no collateral or personal guarantee is required, if the business shows at least $250,000 in annual revenues on the past two years of federal income tax returns.

SBA loan

SBA loans are business financing options where the U.S. Small Business Administration guarantees a portion of the funds. The government backing makes the loans less risky for lenders, which means they can offer borrowers lower interest rates and require smaller down payments. There are several loan programs available through the SBA, including the SBA 7(a) loan and SBA Microloans, and each program has unique use of funds stipulations, maximum loan amounts, and eligibility requirements. Fixed-rate SBA loans can take up to 90 days to fund, so they are a good option for entrepreneurs that can wait for funding and qualify for an SBA loan program. 

Pro tip: During an economic slowdown, small business owners should avoid financing options with variable interest rates. Some loan products that may have variable rates include a business line of credit, credit cards, and some equipment loans.

Tips for getting the right small business loan

Know where you stand

When considering business financing options, it’s important for borrowers to understand their creditworthiness. An applicant’s business and personal credit scores and financial health will be evaluated to determine if they qualify for the loan and what repayment terms will apply. To understand your credit position, consider the four Cs of creditworthiness:

1. Character – Details about the business including size, geographical region, time in business, organizational structure, number of employees, and any past or present legal proceedings.
2. Capacity – Reviews the company’s current debt schedules and monthly cash flows to determine if the borrower can comfortably cover the monthly payments.
3. Capital – Analyzes the financial resources of a small business to determine the borrower’s ability to repay the loan. Evaluated by reviewing financial statements, including the balance sheets, income statements, and bank account statements.
4. Conditions – A look at external factors, like industry trends, market growth, and currency rates.

Choose the right lender

When considering loan options, borrowers can choose to work with either a traditional lender or an alternative lender. Traditional lenders include banks and credit unions and typically offer in-person application processes and low financing costs. Alternative lenders are also called online lenders. They typically offer an online application and fast funding time. Some borrowers also prefer to work with online lenders because they offer more flexible eligibility requirements and documentation requests.

Review your business plan

Once you’ve secured financing it’s a good idea to review your current business plan. Because of changes made to your business model during tough times, like higher prices or additional financing, it’s important to update the business plan to accurately reflect new business goals. The business plan should include the following sections:

• Executive summary
• Company description
• Market analysis
• Management team
• Operational details
• Marketing strategies
• Forecasted financials

Bottom Line

Small business owners are dealing with increased operating expenses, decreased revenues, and labor shortages because inflation is the highest it’s been in almost 40 years. The three best defenses entrepreneurs have against rising inflationary rates are to reduce costs, raise prices, and consider small business financing options. Since the federal funds rate is on the rise, borrowers should look for loan options that offer fixed interest rates and reasonable repayment terms. Working with an online lender, like Biz2Credit, will allow applicants to receive an approval decision and access to funds faster than working with a traditional bank. After all, they were the experts able to help get quick funding for Fido’s Café in New Jersey.