Inflation affects nearly every aspect of our lives, from buying essentials to how businesses operate. Recently, the inflation rate has been rising all over the world, but the numbers are particularly high in India. India’s retail price inflation rate stood at 6.07% in February 2022, according to data from the Office for National Statistics, exceeding the upper limit of 6% set by the Reserve Bank of India (RBI). ). Wholesale inflation also reached 13.11% during the same period.
This affects both consumers and businesses in all areas. It is also important to note that manufacturers and sellers are likely to pass on their increased costs to consumers through higher retail prices.
Even if the effects of the Covid-19 pandemic fade, lingering geopolitical tensions are expected to keep inflation rates high. Businesses can only cope with this domino effect of rising prices and the resulting spike in operating costs by having a contingency plan and contingency fund in place. However, even these solutions can only tide them over for a certain period of time, beyond which they will need additional financial support.
This is where business loans come in. While they can provide immediate funding and help businesses stay operational, there are also some caveats to consider, especially for small businesses. Let’s see if you should take out a business loan to deal with inflation.
What causes inflation?
Inflation refers to the decline in the purchasing power of money due to various macroeconomic factors. Geopolitical tensions and black swan events like the Covid-19 pandemic have had a huge role to play in the current rise in inflation rates. The rate of increase is often represented as the increase in the average price level of a basket of goods or services, such as food or fuel.
In the current scenario, global inflation rates are demand-driven, meaning that demand for goods and services exceeds production capacity as supply chain issues limit production. This, in turn, means that the cost of production increases as bottlenecks delay freight services and imports and exports. As production becomes more expensive, retail prices automatically increase and wages must be increased in parallel in order to keep up with the cost of living.
In the wake of the pandemic, many supply chains that supported global production engines remained broken. This led to a sharp increase in the cost of raw materials, which drove up the cost of production in all areas. Amid strong demand as economies around the world raced to recover from the fiscal impact of the pandemic, fuel costs and transport bills also soared, prompting further compression.
Systemic barriers for business owners
In the short term, it may seem like these issues were caused by the fallout from the pandemic and global political tensions, but research shows that over the past couple of years, business owners have had to deal with the constant increase in the prices of goods and raw materials, because the market was plagued by shortages. Some industries and businesses have been disproportionately affected by this situation due to their overreliance on imported materials. Inflation and its consequences can have various effects on a company’s operations:
- Increase in professional expenses: As raw material prices increase, production costs and operating costs also increase. This automatically increases business expenses, much like the domino effect of rising transportation costs, wages, and overheads like rent and fuel bills.
- Reduced demand and sales: Inflation affects almost all industries and individuals, so it is likely to reduce demand for non-essential goods and services as disposable income dries up. This means lower sales for many companies.
- Cash flow problems: As demand dries up and order pipelines dry up, businesses, especially small ones, are likely to run into cash flow issues and may even struggle to keep operating.
- Lower profit margins: Taken together, these factors lead to lower revenue and profit margins for business owners. This negatively affects the financial health of the business and, in extreme cases, can even lead to the closure of the business.
Should you take out a business loan?
When the cash crunch caused by rising inflation begins to weigh on business operations, business owners, especially those with small businesses, need a contingency plan to stay afloat. . As a small business entrepreneur, you may want to consider the accessible option of opting for a business loan to help you out. Here’s what a business loan can help you accomplish:
- Fund operations: A business loan is designed to cover the operating expenses of a business. Although it can also be used for long-term investments, a short-term business loan can come in handy to cover your business’s working capital needs. Cover employee salaries, rent, utilities, etc. can help your business stay operational.
- Cash facility: A business loan can alleviate cash flow problems and help you cover unexpected expenses arising from increased production and distribution costs.
- Dealing with urgent expenses: Most banks and non-bank financial companies (NBFCs) offer business loans, and some even offer collateral-free loans with a quick turnaround. This feature can be very useful if you need short-term capital.
- Buy Inventory: Inflation signals widespread shortages of raw materials and finished goods. If you want to secure inventory to fall back on in the event of a shortage, you need to invest in storage up front. A business loan can provide the capital needed to buy back large inventory on time.
- Developing the clientele: One way to balance the drying up of demand is to expand your customer base. A broader base means that even reduced demand won’t cause your sales to stop completely. To do this, you need to invest in awareness and relationship building. You might even want to open new locations and add to your offerings to expand your reach. All of these initiatives require substantial investment, and a business loan can provide the capital you need.
- Invest in technological solutions: Another way to streamline your operations, reduce costs, and improve the customer experience is to add technology solutions. For example, you can start an electronic invoicing and accounting process; accept payments online and create an online presence for your business so new customers can find you. A business loan can give you the immediate capital boost you need to invest in these solutions.
While there is always a degree of firefighting involved when it comes to tackling the impact of rising inflation, the best way to deal with it is to keep a length in advance. You can invest in a number of business solutions to grow and improve your operations with a business loan, so your business can survive difficult circumstances without having to make major adjustments.
Factors to consider before taking out a business loan to fight inflation
If you are opting for a business loan to help you deal with inflationary expenses, be sure to consider the following questions:
Lenders have varying criteria when it comes to approving business loans. These can range from your credit history to the age and size of your business. Take the time to do your due diligence and check if you qualify for the loan before you apply. Failed applications can negatively impact your credit score.
Inflation is cyclical. So there is a good chance that your business finances will recover in time and that you will be able to repay the loan, but it is important to consider the deadlines. If yours is a seasonal business or you have several pending orders or payments, a business loan is probably the right option to help you weather the short-term crisis.
- Will you be able to repay it?
Before taking out a loan, it is crucial to consider your repayment capacity. If your business is struggling to meet rising expenses due to inflation, you’re probably in a good position to repay the loan. However, if financial problems worsen, consider carefully whether you have the ability to repay the loan. Failure to pay could hurt your credit score and cause more financial problems for your business.
- Is refinancing or reloading an option?
If you have an existing business loan, you may consider refinancing as an option instead of taking out an additional loan. You can look for ways to take out a new loan at a lower interest rate from your current lender or a new lender to settle your existing debt. This could ease the repayment burden and help you channel some of the expenses into other expenses. Some lenders will also allow you to take out an add-on loan to cover any unexpected expenses on top of your existing loan.
Business loans can be a great way to cover a sudden increase in expenses triggered by inflation. However, it is essential that business owners carefully consider their situation and the nature of their business before opting for a loan, as failure to repay it can lead to worse situations.
If a business loan doesn’t seem like the right option, having a contingency plan and contingency fund in place can help businesses stay afloat in difficult circumstances, and once those options are exhausted, owners Corporates may consider downsizing operations and pausing growth plans until inflation. rates become more manageable.