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What is Inflation and How can it Impact Your Small Business?

Let's explore how inflation can impact your business and what measures you can take to manage your finances during times of inflation.

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In recent months, inflation has become a pressing concern for small businesses. Forbes reports that 1 in 3 small business owners cite inflation as their top business concern. The prices of goods and services have increased almost 9% (March 2022, year over year comparison) while prices paid by wholesalers rose just above 11% over the same time period, according to CNBC. As the cost of goods and services continues to rise above standard levels, profit margins are being squeezed. This is particularly challenging for businesses that operate on tight budgets and don’t have much room for error.

In this post, we’ll explore how inflation can impact your business and what measures you can take to manage your finances during times of inflation. So, if you’re a small business owner looking for strategies to help you stay afloat during these tough times, read on!

What does the “I” word mean?

Inflation is defined as a dip in the purchasing power of currency during a specific period, despite being generally associated with Demand-Pull inflation in which consumers experience an increase in prices when the demand for goods and services outpaces the supply. Either way, inflation can have a major impact on small businesses as it can erode profit margins and make it difficult to maintain affordable prices for customers.

Three types of inflation:

  • Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.
  • Cost-push inflation, on the other hand, occurs when the cost of producing products and services rises, forcing businesses to raise their prices.
  • Built-in inflation (which is sometimes referred to as a wage-price spiral) occurs when workers demand higher wages to keep up with rising living costs. This in turn causes businesses to raise their prices in order to offset their rising wage costs, leading to a self-reinforcing loop of wage and price increases.

There are numerous ways that inflation can impact your small business. For example, if you sell products that are subject to inflation, you may find it difficult to maintain your profit margin. In addition, if your customers are feeling the squeeze of inflation, they may be less likely to patronize your business. Finally, if you have loans or other debts that are linked to inflation, your monthly payments could increase, putting further strain on your finances.

Inflation can also make it difficult for small businesses to access the working capital they need to grow and invest in new products or services, whether in the form of credit or alternative financing. This is because lenders often raise interest rates in response to inflation, making it more expensive for businesses to borrow money.

Examples of how inflation affects various industries

  • The food and restaurant industry. The cost of food and other ingredients often rises faster than the prices of other goods and services making it particularly vulnerable to inflation. As a result, restaurants may have to raise their prices in order to cover their costs, which can lead to lower sales and profit margins. In addition, inflation can make it difficult for restaurants to access the working capital or credit they need to expand their businesses or make improvements such as upgrading older kitchen equipment.
  • The retail industry. Retailers rely on a steady supply of goods from manufacturers and suppliers and when the cost of these goods goes up retailers may have to raise their prices in order to keep up with the competition. The same challenge with accessing new funding can make it difficult for retailers to develop additional services to address the churn rate or loss of customers over a given time.
  • The wholesale industry. Prices for many goods increase making it more difficult for small businesses to compete. For example, in the food industry, inflation causes the wholesale cost of many raw ingredients to increase. This leads some restaurants to raise their prices in order to offset the higher costs. Alternatively, other restaurants may choose to absorb the higher costs in order to remain competitive and keep their prices low. In the clothing industry, inflation causes the cost of raw materials such as cotton to increase. As a result, many clothing retailers raise their prices in order to maintain profit margins.
  • The service industry. Inflation in the service sector is generally caused by Built-in Inflation which has longer lasting effects. For example, it can cause the cost of labor to increase as workers often demand higher wages in order to keep up with the rising cost of living, which in turn affects future growth and business projections. Human Resources professionals beware!

Key things to keep in mind if you decide to raise prices due to inflationary pressures

There are a few key things to keep in mind if you decide to raise prices due to inflationary pressures.

1 It is important to make sure that your prices are still competitive. If your prices are too high, you may lose customers to your competitors. 2 It is important to communicate with your customers about why you are raising prices. This will help them understand the reasons behind the price increase and develop brand loyalty and trust, making them more likely to continue doing business with you. 3 It is important to consider how often you will need to adjust your prices. If inflation is expected to be high for an extended period of time, you may need to raise prices more frequently in order to keep up with the rising costs.

How small businesses can deal with inflationary pressures

If you’re a small business owner, you may be wondering how to protect your small business from the impact of inflationary pressures. Here are four tips:

1 Hedge your costs. One way to protect your small business from inflation is to hedge your costs by entering into contracts with suppliers that fix the prices of raw materials and other inputs. This way, even if the cost of these materials goes up in the future, you’ll still be paying the same price. 2 Pass on your higher costs to consumers. If your costs go up due to inflation, you may need to raise prices in order to maintain your profit margin. But before doing so, make sure that your prices are still competitive. You don’t want to lose customers to your competitors because your prices are too high. 3 Take out loans with variable interest rates. Another way to protect your small business from inflation is to take out loans with variable interest rates. This way, as inflation goes up, so will the interest rate on your loan. But when inflation falls, the interest rate on your loan will also fall. 4 Seek out alternative lending solutions and consider the myriad of options. Tools such as merchant cash advances can provide small business owners with direct access to working capital without the traditional, longer processes of larger financial institutions. In some cases, working capital advances can offer very favorable repayment terms that are based on a percentage or revenue versus a fixed daily amount. 5 Invest in assets that appreciate in value during periods of inflation. Small businesses can also invest in assets such as real estate and bonds, which tend to appreciate in value during periods of inflation. By taking these measures, small businesses can protect themselves from the negative effects of inflation and continue to grow and thrive. If you’re a small business looking to expand into a different neighborhood, acquiring a new storefront or restaurant location may be an option worth considering.

Leverage the benefits of embedded finance

One way that small businesses can combat inflation is by using embedded finance tools and services. Embedded finance refers to the integration of financial products and services into everyday devices and platforms. Whether its paying for a ride share service, connecting your bank account to your favorite online retailer or using a mobile wallet to complete a purchase, embedded finance makes it easier for merchants and customers to access essential financial services in a quick and frictionless manner. The innumerable benefits can help small business owners save money on transaction fees and interest payments, as well as improve customer satisfaction with discounts or rewards to customers who use their financial products and services.

If you’re a small business owner who needs up to $500,000 in working capital, and prefer to not worry about putting up valuable assets as collateral then Fundomate’s small business funding program may be a viable solution for you. The process is not only quick and easy but offers attractive advantages:

  • apply with no impact on your credit score
  • get funded within one business day
  • no personal guarantee or personal assets needed
  • get a qualified offer in minutes
  • favorable repayment options and loan terms
  • no restrictions on utilization of funds
  • generous eligibility requirements including a minimum of $10,000 monthly gross revenue, 12 months or more of business history and a low minimum credit score of 600 and above

Does your organization provides services to a network or merchants? You can improve your merchant engagement and increase revenues by offering automated financing and real-time banking tools that help them manage, optimize, and grow their business during inflation. Fundomate allows partners to become the Original Equipment Manufacturer (OEM) for our merchant Financial Operational System. By partnering with us, merchant-facing businesses can rapidly launch financing and real-time banking services that boost loyalty and create new revenue streams with minimal investment and effort. Click here to learn more.

Conclusion

In the long run, small businesses that adopt embedded finance will be better positioned to survive and thrive in an inflationary environment. By making it easier for their customers to access essential financial services, they can help them save money and improve their overall financial well-being. In turn, this can lead to higher levels of customer loyalty and more repeat business.

While there are a number of ways to protect your small business from inflation, it is important to remember that no one solution is perfect. Inflation is a complex economic phenomenon and its effects can vary depending on the specific industry and market conditions. As a result, it is important to stay up-to-date on the latest inflation data and news so that you can adjust your strategies accordingly.