Small businesses across the country are dealing with the rising costs of goods and services, known as inflation. In this blog post, we'll go over what inflation is, how it impacts small businesses, and a way that businesses can grow even with inflation.
What is inflation?
The International Monetary Fund defines inflation as the rate of increase in prices over a period of time, usually a year. It usually has a major impact on cost of living as the prices of items we all depend on - food, clothes, gas - increase.
This time around, inflation has been largely impacted by the fluctuations in the economy caused by the pandemic. When lockdowns were a thing, demand for gas, shopping, entertainment, etc was way down. Then, when more people started getting vaccinated and numbers began dropping, the market had to react to a sudden increase in demand. This caused disruptions in the supply chain and rising costs.
How does it impact small businesses?
This year, 71% of small business owners reported a 20% or more increase in the costs of doing business. Especially when a small business deals with goods, such as a restaurant or a retail center, they’ll be greatly affected by inflation.
One such effect of inflation on small businesses is that Inventory costs have been skyrocketing. Honeycomb alumnus Casa Brasil in Pittsburgh shared this meme on the restaurant’s Instagram page which really drives home the point:
Especially in a precarious economic climate, when prices go up, customers can be unhappy. They don’t necessarily see the rising costs of raw materials like we see above, they just see that their plate of chicken wings is now a couple of dollars more expensive. This sad misunderstanding can cause them to not return to a restaurant, or to hold some kind of ill will against the business.
With that in mind, if business owners choose to keep prices the same while paying more for their raw materials, it means their profit margins will decrease significantly. In the restaurant industry, where the average profit margin is only 3-5%, this greatly impacts the quality of life of the restaurant owners and makes it difficult for them to remain in business.
What ways are small business owners trying to fight inflation?
Some businesses have found solutions to fighting inflation, though not all of them can be that effective in the long-term. Also, many common solutions to inflation also mean hindering a business’s growth (check out the next section to see how businesses can grow despite inflation.)
One means of fighting inflation is reducing overhead and reducing inventory. Some businesses who have gone delivery-only because of the pandemic lockdowns might remain so to reduce the overhead costs of running a storefront. They might also carry less inventory so they have to pay less up-front for their goods. This kind of strategy requires a good idea of supply and demand, because having less inventory in a time of great demand could mean shortages.
Tracking expenses is another way entrepreneurs are trying to fight inflation. Understanding how much costs have risen lately can be really helpful in figuring out where and how one can cut back a bit if they need to.
Another way small business owners have fought inflation is by downsizing or moving to a cheaper workplace. While in some cases this might be a good thing for the business - particularly if the location they were in previously wasn’t particularly helping them make any more revenue than the new place. However, if rising prices are the only thing chasing businesses into smaller and cheaper places, it can really keep them from growing to their fullest potential.
How can a business grow even with inflation?
Along with prices of materials and food, inflation can cause interest rates to rise as well. If your small business has taken out a loan from a bank that has a variable interest rate, your interest rates might be increasing along with the price of your chicken wings.
Crowdfunding can be a great way to access fair capital for your business, especially if you crowdfund a small business loan. The loans crowdfunded through Honeycomb Credit are fixed-income interest rates, which means that they remain the same rate throughout the entire period of your loan.
This means that while your friend down the street who took out a bank loan started out paying 6 percent and now is paying 8 percent interest, you’ll always pay out 6% interest. You’ll know exactly how much you’re paying off, and when those repayments are due.
Plus, with crowdfunding, you’re not paying back that interest to a bank, you’re paying it back to your friends, loyal customers, and community members who invested in your business. That means you’re putting money in their pocket and helping them build wealth - which we all need a bit of with rising prices on the horizon!
The small business world is always changing - your interest rates shouldn’t change with it.
Check out Honeycomb’s crowdfunded small business loans for a steady way you can raise money for your business from your community. Fill out the form below for more information!
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