How to Use a Business Loan to Combat Inflation

Business Management

Jacques Famy Jr
Review By Todd Millman

Inflation is in the news every day and most consumers and business owners are concerned about the rising costs of goods and services and how that will impact their lives and businesses. Do to this fact, both consumers and business owners have to reconsider how they spend their money and/or operate their business in these uncertain times. 

Pricing pressures on Business owners due to increased costs of goods can be scary and put pressure on pricing to the consumer which may impact sales. Once prices rise on materials business will have to adjust their prices to meet necessary margins of profit or face closure. This fact can be stressful, but obtaining financing for the business may provide the necessary relief while you adapt and change business and operations to inflationary conditions.

Business financing can help if you need additional capital to pursue new opportunities or support business operations while you reconfigure your business to react to inflation. Business loans can provide stability in rapid changes like a spike in cost of goods or immediate change in consumer buying activity.

Having a credit facility in place during inflationary times can be a life saver for the business and provide a stop gap to stabilize and lessen the impact of inflation on your business.

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What Is Inflation? How does Inflation Work?

Inflation refers to the rate at which the general level of prices for goods and services rises, causing the purchasing power of customers to decline. In essence, when inflation is high, the customers money can purchase less because process for goods and services are higher.

Basically, businesses need to pass along the higher cost of goods and/or services on to customer reducing the buying power of the consumer. Inflation can also impact both businesses and consumers by higher borrowing costs with increased debt payments and slower economic growth for businesses causing less sales and revenue.

How Can Inflation Impact Your Business?

For businesses, inflation can increase the cost of raw materials and other inputs. This means companies might need to either absorb these costs, reducing their profit margins, or pass them onto consumers in the form of higher prices.

Inflation can influence interest rates, making borrowing more expensive for businesses. Conversely, when interest rates are adjusted to combat inflation, investments that earn fixed returns might appear less attractive, affecting business decisions on where to place capital.

What can your business do to combat inflation? 

Waiting for inflation to pass is not a strategy. It’s important to take action to address inflation and build an action plan. The following options are considerations to combat inflation on your business.

  • Business Financing - Acquire business financing to invest in your business to offer new products and or services to build new streams of revenue. 
  • Raise your business’s prices - To maintain your profit margins you may be forced to increase your prices due to the increase in cost of goods and/or services.
  • Cutting business expenses – When combating inflation all expenses should be on the table. Whether it’s cutting staff to save on labor costs or renegotiating costs with vendors. Complete a breakdown of all business expenses and see which can be cut, reduced or renegotiated for lower costs.

Improve Efficiencies - Investing in technology or re working operational processes can improve efficiencies and save a lot of money for your business. Consider all aspects of work flow and evaluate if there are any opportunities to operate the business in a more effective way. 

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How Can a Business Loan Help to Combat Inflation?

In what ways can a business loan or other type of financing help your business in inflationary times? Below is the most common ways financing can help your business combat inflation and overcome obstacles to the business’s success.  

1. Cover Expenses 

Purchasing inventory in a rising cost of goods environment can be challenging. Business loans can take that expense and spread the cost over time with affordable payments. Rising costs leads to higher expenses for businesses. A business loan or line of credit can cover those expenses or keep your payroll from overwhelming the business cash flow. 

2. Inventory Purchasing

With inflation, the cost of goods will fluctuate and buying inventory can be overwhelming. With a business credit facility like a business loan or line of credit you will always be able to buy the necessary supply or inventory to meet customer needs and take advantage of bulk purchasing to reduce the costs of goods as there going up due to inflation. 

3. Investing in your Business

Investments in new technologies or projects for your business that will improve efficiency to increase productivity and profits is another common use of funds from a business loan or line of credit. With inflation creeping up the cost to operate, looking to improve efficiencies and making investments in changes the way you operate can save you a lot of money in the long run and remain competitive and profitable. You may also want to grow your business with new opportunities and you will need capital that you payback over time while you reap the benefits of the new idea or opportunity.   

Which Type of Business Loan Can Help Me Combat Inflation?

There are many types of business financing that have unique benefits depending on the use of funds. Let’s dive into the most popular business financing products used to support your business against inflation.

1. Business Line of Credit

A business line of credit is a flexible business funding option that allows you to draw up or down on funds up to a credit limit. You only have to pay interest on the balance outstanding making it a great option for short term financing.

  • Rates starting at 1% per month simple interest
  • Flexible and versatile
  • Fast access to capital on demand

2. Business Term Loan

A business term loan is a loan with a fixed lump sum of money offered with fixed rates, terms and payments. Business term loans tend to have longer durations to repay than lines of credit.

  • Terms from 6 to 24 months to repay
  • Attractive rates and terms
  • Access to larger amounts of capital

3. Revenue-Based Financing

Revenue based financing comes in the form of merchant cash advance which is an advance of future receivables of a business which is repaid via a set percentage of future sales. Allows for businesses with credit impairment or those who cannot get approved for a term loan or line of credit for one reason or another.

  • Higher approval rates
  • Flexible repayment based on future sales
  • No set term payment

4. Equipment Financing

Inflation will attack and increase the costs of many goods including equipment which purchasing a challenge. Also, the cost of financing can also cost more with rising interest rates. Business equipment leases or equipment loans help alleviate the large upfront cost of purchasing equipment and preserve cash reserves of a business.

  • Terms that range from 2 to 5 years
  • Monthly payments
  • Equipment is used as collateral to secure financing

5. SBA Loans

SBA loans are loans backed by the Small Business Administration and provide business funding for working capital or business expansion at very attractive rates and terms. Qualifications can be challenging with a significant application process and the requirement a very good credit.

  • SBA 7(a) loans come with terms from 5 to 10 years (up to 25 years with real estate)
  • Rates starting at prime rate plus 2.25%
  • Monthly Payments 

How to Apply for a Business Loan

When looking to apply for a business loan the following are the most common steps.

Step #1: Identify the need and use of funds for your business – Understand the reasons you need money for the business as this may dictate what product you choose.

Step #2: Understand your Qualifications – Learn what your credit looks like as well as the documentation you can provide by talking with a business fiancé specialist. They will help guide you to what business financing product(s) you will want to consider.

Step #3: Application – Fill out application and provide necessary documentation such as business bank statements to get pre-qualified for business funding. Your business finance specialist will out line what documents are specifically needed to get pre-approved.

Step #4: Receive Offer(s) – Once you receive offers consider the product features, rates, terms and conditions and compare offers to make sure you are getting the best available based on your qualifications.

Step #5: Make Selection – Once you have made a selection, accept offer and anticipate signing an agreement and providing closing documentation to receive final approval and funding.  

Step #6 Business Funding – The lender will receive closing stipulations and do their final verifications as well as set up repayment process. After everything is cleared to close funds are then sent to the business.

*The application process may vary depending on lender and product chosen.

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Frequently Asked Questions

How Does Inflation Impact Business Lending?

Inflation impacts business lending in that the cost to borrow will increase due to rising interest rates and fees. A business owner needs to way the pro’s and con’s of business financing and do a cost vs. benefit analysis when determining the value of getting a business loan.

For example, SBA loans are based on prime rate + 2.75. If the prime rate has risen due to inflation to 7.25% from 3.25% you can expect a significant increase interest rates and costs of the money you are borrowing

Due to inflation, you must ask your self does the cost of financing out way the benefit of receiving the money for the business. If the answer is yes then go ahead and proceed. 

How to maintain a profitable business with Inflation?

Maintaining a profitable business during times of inflation requires proactive strategies to counteract the rising costs and potential decrease in purchasing power. By continuously monitoring expenses, businesses can identify areas where costs can be trimmed or where efficiencies can be introduced to maintain margins. Diversifying product lines, services, or even geographic markets can provide a buffer, as inflation may not affect all segments or regions equally. Furthermore, fostering strong relationships with suppliers and customers can lead to more flexible pricing arrangements, ensuring a steady flow of income even when economic conditions are challenging.

Its important to remain calm and focused on ways you can make the business efficient and profitable as possible.

Is there such a thing as an inflation proof business? Can my business avoid being affected?

No business is truly "inflation-proof," as every sector can feel the ripple effects of rising costs in one way or another. However, some industries, particularly those dealing in essential goods and services or those with high pricing power, may be more resistant to the immediate negative impacts of inflation. To increase the resilience of your business, it's crucial to focus on flexibility and adaptability. Continuously monitoring market conditions, diversifying revenue streams, and building strong relationships with both suppliers and customers can help mitigate potential challenges and ensure sustainability through inflationary periods.

Jacques Famy Jr

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