How to Handle Inflation with Small Business Loans

Disclaimer: Information in the term loan articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the term loan articles often covers financial products that Biz2Credit does not currently offer.

In this article:

• Why entrepreneurs should care about inflation
• Solutions for dealing with inflation as a small business owner
• Small business loans that can help get through inflation
• Tips for getting the right small business loan

Why entrepreneurs should care about inflation

In 2020, small business owners had to learn to navigate a new normal during the pandemic. Many businesses shut down for months, and as the world opened back up, they were forced to cope with unprecedented labor and supply shortages. Despite supply chain issues and shortages in raw materials, consumers were eager to get out of their homes and spend money. That rebounding demand led to global inflation affecting small businesses.

Today, businesses and consumers are still contending with inflation. The U.S. Central Bank, or Federal Reserve, has worked to combat inflation, but there is no exact science to predicting when things will even out. The best defense for entrepreneurs is exploring strategies to combat inflation and learning the steps they can take to protect profit margins.

Issues entrepreneurs face due to inflation

Raising prices for businesses has a domino effect in the economy. When materials become more expensive, businesses must charge more for the same products, potentially alienating customers. Inflation affecting small businesses can have a wide range of consequences.

Financial planning

Financial planning for inflation is exceedingly difficult, forcing small business owners to make tough decisions. 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 must consider which suppliers to stay with and where there’s a need for more cost-effective options. Managers must reconsider their business plans, streamline processes, and reevaluate any growth strategies or expansion plans. 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 cut back where possible. They may put off large purchases, like electronics, real estate, discretionary services, and vehicles. To prepare for the continued hardships, customers compare prices, and lower costs become more of a priority than previously considered. Increased prices on everything means raising costs for businesses, which can impact your end consumer.

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

Inflation causes increased material, supply, utility, and borrowing costs for small business owners. As cost of goods increases 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 strain 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 demand 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.

Dealing with increased input costs is a major challenge for many entrepreneurs.

Cash flow concerns

A combination of accounts receivable collection difficulties, increased input costs, and lost revenues can cause cash flow concerns during inflation. Decreased cash flows may stress 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

There are several strategies to combat inflation that business owners can implement to help survive rising inflationary rates and even the threat of a recession.

Raise prices

At the peak of post-COVID inflation, Business.org shared that 89% of small businesses had to increase their prices to manage inflation. 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’s also a bad idea to raise prices while 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.
• Shrinkflation: 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 price hikes if they feel like they’re getting more for their money. Consider adding cost-effective value items to your service packages or products. The value adds will depend on what 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 to control costs. Many expenses can be cut during periods of inflation, including the following business costs:

• 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 reduce supply costs and storage needs.
• Contracts: Contact vendors and contracts to inquire about negotiating your current prices. Some vendors may offer a discount if you commit to a longer contract, or some 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

There are many small business financing options that can reduce the impact of inflation affecting small businesses. Even as interest rates remain high, term loans for small businesses can secure capital now before the value of a dollar decreases again. (Because, over time, it just about always does.)

A small business loan can support equipment purchases, inventory re-stocks, renovations, or even consolidate other debts. 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.

If you’re not confident about term loans for small businesses, the best business credit cards for small businesses offer 0% APR introductory rates that can support investments in the business without the interest charges.

Startups and established entrepreneurs alike can increase their purchasing power and diversify business operations by securing capital.

Small business loans that can help get through inflation

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

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

Small business financing options are a great business tool for many entrepreneurs, but with inflation affecting small businesses, there are some additional precautions borrowers should take.

Make sure you explore 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 loans

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 depend on the lender issuing the funds and the borrower's creditworthiness.

The eligibility requirements of terms loans for small businesses vary between lenders, 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.

Biz2Credit offers small business term loans up to $6,000,000 with competitive interest rates. Since Biz2Credit is an online funding providerwe also offer an online application process, easy approval requirements, and the possibility of same-day funding.

SBA loans

SBA loans are business financing options in which the U.S. Small Business Administration guarantees a portion of the funds. 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 who 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

Getting a loan isn’t always an easy process. These tips can help you secure the funding you need.

Know where you stand

When considering business financing options, borrowers need 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: The company’s current debt schedules and monthly cash flows determine if the borrower can comfortably cover monthly payments.
3. Capital: The financial resources of a small business 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, typically offering in-person application processes and low financing costs. Alternative lenders, also called online lenders, 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, you should 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 reflect new business goals accurately. The business plan should include the following sections:

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

Bottom Line

Inflation affecting small businesses has caused increased operating expenses, decreased revenues, and labor shortages. Although inflation is slowing, entrepreneurs should continue to deploy strategies to combat inflation, like reducing costs, raising prices, and considering small business financing options.

Working with an online funding providerlike Biz2Cred`it will allow applicants to receive an approval decision and access funds faster than working with a traditional bank. After all, they were the experts who helped get quick funding for Fido’s Café in New Jersey.

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