The Impact of Inflation on Small Businesses

by | Dec 23, 2021 | Business Finance | 0 comments

While many businesses took a hit due to the pandemic, the effects continue to linger. The inflation that we are experiencing now significantly impacts many smaller companies’ business operations. A recent survey suggested that nearly seventy percent of those polled cited inflation as one of the main reasons why their businesses are struggling right now. Throw in supply chain issues as well, and it is easy to see why entrepreneurs are working to make it in this economy.

The primary problem with inflation for business owners is that goods and services are more expensive than they have been in some time, perhaps than they have ever been before. This prohibits businesses from purchasing what they need, and thus, their pricing reflects this. Higher prices equate to more hesitant customers. The cycle is indeed a vicious one, given the climate we are now facing in this country.

Can Businesses Cope with Inflation?

This is the question that has many business owners scratching their heads. After coming off of an abysmal year and the events that occurred in 2020 and 2021, figuring out how to deal with inflation is no easy task. In some instances, for some businesses, issues associated with inflation have even overtaken concerns surrounding COVID.

Again, the issue is pricing and how increased prices lead to consumers spending less. Not to mention, as goods and services have gone up in price and businesses have had to find ways to deal with the extra costs, it often has happened that they’ve had to cut back on staff. This shortage of employees adds to the already problematic scenario small businesses face.

Borrowing Money During Times of Crisis

One way numerous businesses have dealt with inflation in the past few months is to turn to commercial financing. Another recently conducted survey showed that nearly 50% of those asked said they’ve taken out a loan to handle the inflation they’re facing. And just over twenty percent polled said that they’ve been borrowing money regularly since the onset of the pandemic. These numbers are slightly higher than they would generally be, yet it makes perfect sense.

Experts suggest that the reason for the broader spread of borrowing by companies is simple: they need to stay in business. So, for example, a retail store has no choice but to purchase goods and inventory. Due to inflation, prices are higher. They may not have the extra cash on hand to accommodate these higher prices, so they turn to business funding to get the money they require. This enables that retailer to stay in business, and ultimately, upon selling their products, they can repay the loan.

One issue, as noted, is that retail stores have to increase prices in response to inflation-fueled circumstances. Some customers aren’t necessarily willing to pay more, though. So it does become about finding that balance between the market and what the business needs to survive.

Business Loans Are Helping

Last year, the average business loan was right around 70k. At the height of the Paycheck Protection Program, the average loan was just under 50k. The obvious conclusion is that businesses need money now. And they are consequently turning to lenders for help.

While loans are helping bail some small companies out during this challenging financial time, other contributing factors are still hurting small businesses, between labor shortages and supply chain issues. Many struggle to make ends meet. Given that wage pressures are tightening for some employers, the inflation issue is starting to impact their ability to operate effectively significantly.

That said, it is not just smaller businesses that are being affected. Larger and midsize companies, with between 100 and 500 employees, are also hurting due to inflation issues. And they too are having to raise prices when many consumers are skittish about paying more given the current environment.

First Union Lending Wants to Help

Right now, for inflation to be impacting businesses in this way is particularly dire, as numerous small companies are still recovering from the brunt of the pandemic shutdowns. Whereas initially, organizations faced COVID fears, lockdowns, and a lack of customers, now they are dealing with a whole new set of problems—ones that can be just as crippling. There is inflation, of course, labor shortages, and supply chain issues on top of all of it. Small business owners are just trying to figure out how to weather the storm.

First Union is here to help! We get small businesses the money needed even during the most difficult times. With short-term loans, lines of credit and SBA loans, we have a funding solution specifically for your company. Call today!