Inflation has become a major problem, harming consumers and businesses alike. Due to supply shocks caused by the Covid-19 pandemic, geopolitical conflict, high oil prices, and strong consumer spending, it is higher than it has been in over four decades. The consumer price index (CPI) rose 8.7% (on an annualized basis) in the year period ending in July 2022. This rate was slightly lower than June’s annualized rate of 9.1%. It remains to be seen if inflation is abating. After having initially forecast inflation to be transitory last year, Treasury Secretary Janet Yellen now expects inflation to ‘remain high.’ Coupled with fears of a recession, many business owners worry about inflation, and rightfully so—91% of them report being negatively affected by broad economic trends! There are many ways in which inflation negatively impacts a business. Often leading to serious problems with cash flow and access to working capital.
The primary way in which inflation hurts a business is through cost increases.
Expect material costs all along the supply chain to increase, as well as supply shortages slowing down the production process. Distribution and shipping costs are also rising, a particularly significant factor with energy prices at historic levels. These compress profit margins, prompting many businesses to seek to counter rising costs by raising their prices. However, they are limited in the amount that they can do so without losing customers. Wages have not risen at the same level as prices. Consumer demand drops as buyers have less purchasing power against higher prices. In this environment, with higher costs and the risk of less sales, small businesses naturally find themselves with less working capital.
This makes it harder to pay expenses, let alone make a profit. Overhead costs are increasing as well, not to mention pressure from employees to increase salaries. If pay is not increased, companies risk losing valuable workers and having to hire expensive replacements as a result. Essentially, inflation causes a plethora of issues which compound putting a heavy strain on cash flow.
While going to the bank for a loan is often a business’s first thought to get funds, it is not always the best option.
When inflation causes cash flow issues leading businesses to have less working capital available, they are often inclined to consider taking out a small business loan. However, a traditional bank loan can be inaccessible for many small businesses. There are strict requirements to qualify for a bank loan. Cash flow problems exacerbated by inflation can indirectly hurt your credit score – making it more difficult to meet these requirements. As other expenses increase, firms have less money available to make existing debt payments, which can force them into situations that will hurt their credit score.
Meanwhile, in a time of high inflation, traditional bank loans can be prohibitively expensive. Inflation leads to higher borrowing costs that can make taking out a new loan a damaging decision for a company. To combat inflation, the Federal Reserve (the “Fed”) increases interest rates with the intent of cooling down an overheating economy. On June 15th, it did so by raising the overnight discount rate by 75 basis points, the highest such rise in nearly three decades! When the federal funds rate is increased, bank loan rates follow. Thus, while a loan can seem like a smart way to get capital and ease cash flow concerns during a period of inflation, companies must consider the impact of having to make payments with higher interest rates for a long time.
Inflation can significantly hurt a small business’s operations; taking out a loan is no panacea.
However, there is an alternative mode of financing to help improve cash flow without the problems of a loan: invoice factoring! With factoring, a company like CapFlow Funding will purchase your outstanding invoices by paying you the value of the invoice at a slight discount. Unlike a bank loan, there is no liability on your balance sheet. Nor do you have to make regular payments with high interest rates. You also do not lose any equity in your company. An added benefit of invoice factoring is that you will get money significantly faster than with a loan. This allows your business to better manage its cash flow during tough times.
Your company will not have to worry about having funds on hand to pay expenses in the months before an invoice would typically be paid, and you can also use the influx of funds to begin fulfilling the next round of orders. Inflation has the potential to really harm your business’s cash flow. However, invoice factoring can provide the liquidity you need to stay on track.