Should you take out a business loan to deal with inflation? – Forbes Advisor

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

The United States Chamber of Commerce released its latest Small Business Index in October 2021. The report found that business owners are coping with the impact of inflation in many ways. Some small business owners are raising prices. Others have chosen to reduce their workforce to compensate for increased expenses.

Meanwhile, nearly 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 for all items between December 2020 and December 2021, according to the Consumer Price Index. The seven percent increase represents the highest annual inflation rate the country has seen in four decades since 1981.

Food and energy prices are among the main contributors to the rise in inflation.

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

How Inflation Affects Small Business Operations

Many Americans are feeling the effects of inflation on their household budgets. Additionally, rising costs can also have a significant impact on a small business’ bottom line.

According to the Small Business Index, almost 75% of small business owners worry about the impact of inflation on their business. Meanwhile, more than two-thirds of small business owners (71%) say their business has already felt a significant impact due to the higher prices they pay in many areas.

A separate survey by the National Federation of Independent Businesses (NFIB) found that 22% of small business owners say inflation is the biggest problem they face. Labor shortages are another common problem, with nearly half of businesses (47%) saying they have vacancies they cannot fill.

Inflation can also have a trickle down effect for small businesses, creating a number of challenges to overcome, including:

  • Cash flow difficulties
  • Reduced sales
  • Demand for higher wages from employees
  • Lower profit margins
  • Drop in customer satisfaction
  • Poor financial health

What types of businesses are most affected?

The effects of inflation can be felt by many types of businesses. However, some companies are likely to experience more difficulties than others. At the same time, some industries could benefit from rising costs.

Businesses that need to buy or hold a large amount of inventory tend to feel the effects of inflation the most. Retailers, wholesalers, and manufacturers can fall into this category.

In comparison, companies in the real estate and mortgage industries could see higher commissions and larger profits due to higher selling prices. Commodity producers (e.g. mining companies, logging companies, etc.) may also benefit from higher profits due to higher material costs.

Should you take out a business loan to deal with inflation?

Many business owners seek financing to deal with the impact of inflation on operating costs. Nearly half of small business owners have taken out a business loan in the past year in response to inflation challenges.

Before deciding to borrow money, however, it’s important to consider whether this is the right approach for your business. If you’re considering getting a business loan to manage the effects of inflation, you might 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 advance your business (eg hire new employees, invest in new technology to improve operations, market to new customers, purchase real estate, etc.)?
  3. Will your credit status make it harder or easier to get affordable financing?
  4. Can you meet the loan requirements needed to qualify for a business loan?

Borrowing money can also be a good idea 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, it could help your business reduce expenses and unexpectedly offset inflation.

If you 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 ensure you get the best small business loan available.

Other Ways Businesses Can Fight Inflation

In some cases, a small business loan can be an effective way to manage the effects of inflation. But business financing is not the only option available. Here are three alternative strategies you can consider to protect your small business from inflation.

1. Raise the price of goods and services

Price increases are the most popular way small businesses use to offset the effects of inflation. According to the US Chamber of Commerce, three out of five small businesses say they have raised prices in the past year.

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

For this reason, you may want to consider whether strategic price increases for certain goods or services are a better choice for your business. You can selectively increase prices instead of increasing costs for all customers.

It can also help provide additional benefits to customers in exchange for a price increase. Free shipping, extended warranties, additional services, gifts with purchase, and discount opportunities for future purchases are all potential ideas to consider if you think price increases are needed for your business.

2. Reduce staff and reduce payroll

Another common strategy that small businesses tend to turn to during times of inflation is downsizing. The Small Business Index for the fourth quarter of 2021 indicates that 41% of small business owners have reduced their number of employees in the past year.

Of course, there are also downsides to downsizing your staff. So be sure to carefully consider your situation before taking any action that could potentially harm rather than help your business. If you have to make layoffs, be sure to make your staff reduction decisions in a way that avoids discrimination.

3. Lower the deliverable

Instead of raising prices, some companies are considering an alternative approach. By delivering a little 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.

Find the best small business loans of 2022

Conclusion

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

If you think a small business loan might benefit you, take the time to do your research. Comparing multiple loans can save your business a lot of money in interest and fees for years to come.

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