As prices rise and inflation rears its ugly head, you may be wondering how you can use business financing to try to weather the storm. Credit lines can be a life preserver of sorts. They can offer a lifeline in the midst of an inflation storm, when price stability is non-existent. It’s time to stop trying to figure out what’s causing inflation. Let’s talk about how to survive.
Inflation Isn’t Just When Prices Rise
According to the International Monetary Fund, “Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.”
Now, we may expect higher prices on goods and services as almost normal. Even when there’s not a lot of inflation, we may still see prices rise. However, when the inflation rate rises, prices go up more quickly.
This makes it hard to stay ahead. The price increases happen faster than individuals and businesses can start to bring in more cash. In turn, people have to stop spending in certain areas. They have to be able to afford necessities. Luxuries like manicures, travel, and eating out go by the wayside.
As a result, businesses that offer these types of services lose sales. Then, they have to raise their prices. This makes more people cut back because even fewer people can afford them. In the meantime, these businesses are also having to pay more to suppliers. It’s a vicious cycle, as you can see.
Interest Rates and Inflation Have a Relationship
According to the Federal Reserve Bank of Cleveland, “When inflation is too high, the Federal Reserve typically raises rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”
This kind of push-pull monetary policy is designed to affect consumers’ decisions on whether to spend or save. When there are higher interest rates, it makes sense to save more money. That’s assuming it’s possible given the money supply.
When rates are lower, the opposite is the case. A consumer’s best economic activity may be spending. This is the time they may choose to pay medical bills, make home improvements, or take the leap to pay for services they’ve been considering. Why not, their money will go further. Overall demand may rise. Lower interest rates can also mean a consumer would want to borrow money.
The same is true for businesses. When the money supply is plentiful and will go further, it’s easier to spend, which in turn promotes economic growth.
Inflation Means Goods and Services Become More Expensive
When the inflation rate starts to outstrip how quickly a person or business can bring in cash, then the individual or company will need a greater amount of money to do the same things as before. Production costs may become higher, and that translates into price increases further down the line.
With the same amount of money to work with but prices rising, money doesn’t go as far. That’s inflation at it’s finest and why it stunts economic growth.
The Consumer Price Index is Often Used to Measure the Inflation Rate
According to Investopedia, “The Consumer Price Index is calculated by measuring the price in one period for this fixed basket of consumer goods and services compared to their prices in previous periods. Changes in the CPI, therefore, approximately reflect changes in the cost of living in the U.S. As such, the CPI is an economic indicator most frequently used for identifying periods of inflation (or deflation) in the U.S.”
Business Credit Lines Give You a Unique Advantage to Ease the Impact of Inflation
If you have business credit lines in place before a hike in an interest rate, you have an advantage. You’ll still feel the waves of inflation. The Federal Reserve can still cause those waves to feel overwhelming. However, you can fight back by using credit lines to make necessary purchases now, before the interest rate rises again.
For example, inventory, supplies, and more can be purchased in bulk using a credit line. You can pay it off over time at that price, and it will be cheaper than if you had waited until the cash flow could handle it. That is, if the interest rates rise before then. Of course, there is a balance. You have to pay anything you buy off before rates rise again as well.
Create Breathing Room
This is another way business credit lines can help. If you are feeling the crunch of higher prices, you can create breathing room by using credit. Cash may not go as far, so the ability to use your credit to stretch payments over time can be helpful. Of course you want to pay any outstanding balance as soon as you can. Still, you can use credit to finance purchases.
Some business owners without a credit line for their business may be tempted, or even find they without another option, to use personal loans or credit lines for this. They may even feel they need to take a loan secured by personal assets, such as a home. That’s not a good idea.
If you can get a business credit line in place, it will be much better than taking out a personal credit line or loan. Even personal unsecured lines can damage your personal credit. With business credit, you’ll be able to protect your personal credit, and typically business credit lines have better interest rates and higher limits anyway.
Paying Over 2 to 3 Months can Give you Time to Recoup Additional Costs
Keep to a tight repayment schedule because the earlier you pay, the higher your business credit scores will be. This can help you in the future if you need a business loan. While a credit card company charges interest to your business, be sure to use that time to invest in growth.
The big issue with inflation is that the money supply does not go as far. You can’t do as much with it. You need all the help you can get. So in addition to business lines of credit, accept credit cards for business offers if you get them. If they are reasonable of course. The more options you have the better.
Invest in Growth
Despite what the economy is doing, you need to go into any time of inflation with a plan. If you can consider any interest paid as an investment, then you are doing well. You can do this even if the Fed continues raising interest rates, and despite the fact that the purchasing power of your cash has decreased significantly. It just takes some planning.
Leverage Credit for Quick Returns on Investment
If you are using all of your available cash to just stay above water between meeting demand and meeting rising prices, you can use available credit, including credit cards, to invest in growth. Here are some options.
Marketing and Ads
To better pay for goods and services during a time of inflation, amp up sales and marketing. Do so using the purchasing power of your credit cards. Be sure to balance things by spending more on high performing ads. The goal is to use the profit from the increase in sales to pay off the marketing spend and still have more profit than you would have without the spend.
Events and Sponsorships
Use what you can to sponsor events or even fund your own. Often this type of spend is tax deductible. Better yet, you also get the benefit of the positive marketing that comes with it.
New Products or Services
Credit works also to pay for introducing new events and services. If you can find something to offer customers that can help them through this time as well, you’ll be golden.
For example, a nail salon may offer a smaller package that costs less. A diner might introduce a daily lunch special that is a little less food but also a lower price.
This will allow customers to keep up spending on things they want without breaking the bank. They feel less crunch, and you will keep their business.
You can also use credit to pay for new hires in the short term. In a struggling economy, offering employment is vital to help the economy grow. Use these new hires to help implement the new services you are offering.
Reserves for Uncertainty
Companies need a fail safe, and credit is great for that. Even if you do not need it right now, it’s best to have it in place so that when you do need funds, you can avoid a loan at a higher rate. Banks are not as likely to give loans during these times anyway. If something expected pops up and you need financing that requires you to borrow the funds, things could get ugly.
It’s much better to have the credit on hand already to fill cash gaps, keep up with supply and demand, and avoid having to approach a bank to borrow new funds. This is especially true during a period of inflation.
Don’t Forget About Vendor Credit
If you have credit accounts open with vendors, use them to their fullest capacity. This advice is not limited to just during inflation either. Vendor accounts are usually net accounts. That means they are due in full at the end of the designated time, so there is no interest. Use them to purchase whatever you can that you need, as long as you can pay it off before the net term ends.
This will allow you to use the credit options that charge interest for other things, while keeping up with any inventory, supplies, or services that you can using vendor credit. This should probably be a part of your company monetary policy anyway.
If you don’t currently have credit accounts with vendors, get on that now. Credit Suite can help, and you may be surprised how handy these accounts can be not just during inflation, but all the time. There’s no need to deal with banks and borrow funds or finance goods and services that you can purchase using vendor credit.
Credit lines are a great way to survive the crunch that inflation can put on business finances. Credit cards and vendor credit can help tremendously as well. Just remember to manage credit wisely. It will not do you any good to float through inflation if you end up drowning in credit card bills.
Still, these types of credit can help you avoid traditional loans from banks during hard economic times. That’s good, because you would likely end up with less favorable terms, even if you can get approval. Banks do not lend as freely during inflation.
Of course a business credit line from a bank is going to have an interest rate similar to a loan. Still, the difference is that you only pay on what you use. You can control your monthly payment by using only what you need.
A loan is not the same. You will have to make the same minimum monthly payment regardless of whether you have the cash flow or not. That can cause a huge budget crunch if things get tough.
By using credit lines, credit cards, and vendor credit wisely, you can avoid this and have much more flexibility during periods of inflation. There are many options for each of these. Wondering where to start? Consider a Credit Line Hybrid from Credit Suite.
Even better, talk to one of our business finance specialists and find out how to get started finding the best funding options for your business that will help build your business credit score. The higher your business credit score, the more funds you’ll have access to. Access to more funds is always a good thing.
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