Should You Take Out a Business Loan to Deal With Inflation?

39 views 2:57 pm 0 Comments February 22, 2022

Small businesses across the country have faced many challenges over the past several years. And now, on top of Covid-19 and supply chain issues, inflation is taking its own toll on small business owners.

The U.S. Chamber of Commerce released its latest Small Business Index in October 2021. The report revealed that business owners are coping with the impact of inflation in numerous ways. Some small business owners are raising prices. Others have opted to reduce staff numbers to offset increased expenses.

Meanwhile, close to half of small businesses have turned to financing to manage inflation-related issues—45% of small business owners have taken out a loan.

Current Inflation Rates

Consumers in the United States faced a 7% price increase across all items between December 2020 and December 2021, according to the Consumer Price Index. The seven-percent increase represents the highest year-over-year (YOY) inflation rate the country has experienced in four decades, dating back to 1981.

Food and energy prices are among the biggest contributors to rising inflation numbers.

  • Food prices have increased at least 0.5% for 10 months in a row (January 2021 to January 2022), leading to an overall food index increase of 7%.
  • Energy prices have risen 27% over the last year.

How Inflation Impacts Small Business Operations

Many Americans are feeling the effects of inflation on their household budgets. What’s more, increased costs can have a meaningful impact on the bottom line of a small business as well.

Nearly 75% of small business owners are worried about how inflation will affect their business, according to the Small Business Index. Meanwhile, over two-thirds of small business owners (71%) say their companies have already felt a significant impact as a result of the higher prices they’re paying in many areas.

A separate survey by the National Federation of Independent Businesses (NFIB) found that 22% of small business owners report inflation as the biggest problem they’re facing. Worker shortages are another common struggle, with almost half of businesses (47%) saying they have job openings they cannot fill.

Inflation can have a trickle-down effect for small businesses, too, creating a number of challenges to navigate, including:

  • Cash flow struggles
  • Reduced sales
  • Demand for higher wages from employees
  • Lower profit margins
  • Decrease in customer satisfaction
  • Damaged financial health

What Types of Businesses Are Affected the Most?

The effects of inflation may be felt by many different types of businesses. However, some companies are likely to struggle more than others. At the same time, certain industries may benefit from rising costs.

Businesses that need to purchase or keep a lot of inventory on hand tend to feel the impacts of inflation the most. Retailers, wholesalers and manufacturers may fit into this category.

In comparison, businesses in the real estate and mortgage industries might see higher commissions and larger profits due to higher sales prices. Producers of raw materials (e.g. mining companies, lumber companies, etc.) may also enjoy higher profits thanks to the rising costs of the materials.

Should You Take Out a Business Loan to Deal With Inflation?

Many business owners do seek financing to deal with the impacts inflation has on operational costs. Close to half of small business owners have taken out a business loan in the past year in response to inflation-related challenges.

Before you decide to borrow money, however, it’s important to examine whether doing so is the right approach for your company. If you’re thinking about getting a business loan to manage the effects of inflation, you may want to ask yourself the following questions first:

  1. How much can your business comfortably afford to repay each month?
  2. Can you use the funds you borrow to help move your business forward (e.g. hiring new employees, investing in new technology to improve operations, marketing to new customers, buying real estate, etc.)?
  3. Will the condition of your credit make it harder or easier to obtain affordable financing?
  4. Can you meet the loan requirements necessary to qualify for a business loan?

Borrowing money might also make sense if you want to refinance a business loan. If you can take out a new loan with a lower interest rate to pay off existing debt, that could help your business cut its expenses and offset inflation in an unexpected way.

If you do decide to borrow money for your business, it’s important to take the time to shop around and consider several financing options. Comparing multiple loan offers puts you in a better position to make sure you’re getting the best small business loan available.

Other Ways Businesses Can Combat Inflation

In some cases, a small business loan can be an effective way to manage the effects of inflation. But business funding isn’t the only option available. Here are three alternate strategies you can consider to protect your small business from inflation.

1. Increase Price of Goods and Services

Price hikes represent the most popular way that small businesses try to offset the effects of inflation. Three out of five small businesses report increasing their prices over the past year, according to the U.S. Chamber of Commerce.

The danger with price increases, of course, is that you may upset your customers. This could lead to lower sales and even the loss of some buyers altogether.

For this reason, you might want to consider whether strategic price increases of select goods or services are a better choice for your company. You could selectively raise prices instead of making costs higher for customers across the board.

It may also help to offer extra benefits to customers in exchange for increased prices. Free shipping, extended warranties, extra services, gifts with purchase and discount opportunities for future purchases are all potential ideas to consider if you feel like price increases are necessary for your business.

2. Decrease Staff and Reduce Payroll

Another common strategy that small businesses tend to turn to in times of inflation is reducing staff. The Small Business Index from Q4 2021 indicates that 41% of small business owners cut their number of employees over the past year.

Of course, there are downsides to reducing your staff as well. So, be sure to examine your situation carefully before you make a move that could potentially hurt your business instead of help it. If you must move forward with layoffs, be sure to make your staff reduction decisions in a way that avoids discrimination.

3. Lower the Deliverable

Instead of increasing prices, some businesses are considering an alternate approach. By delivering slightly less of a product or service for the same price, your business may be able to cut expenses in a way that’s more palatable (and perhaps less noticeable) to its customers.

Bottom Line

Inflation can cause financial stress, especially for small business owners. But there are quite a few strategies you can use to deal with the impacts of inflation and protect the health of your business.

If you believe a small business loan might benefit you, take the time to do your research. Comparing multiple loans has the potential to save your business a lot of money in interest and fees over the coming years.

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