Tips for Small Businesses to Manage the Impact of High Interest Rates and Inflation

It’s no secret that high interest rates and still-stubborn inflation have impacted consumers and businesses alike.

The rising costs of raw materials and inventory coupled with increased borrowing costs can have a major impact on the sustainability of small businesses’ cash flow and operations.

Here are tips for small businesses to help manage the impact of high interest rates and inflation.

Revisit Your Business and Pricing Strategies

While many small businesses reimagined themselves because of the pandemic, it is important to always remain nimble to deal with potential headwinds.

Reevaluating your business and pricing strategies to ensure they’re still the right mix for your business is a good starting point. Ask yourself a few questions about your business model and services, like should you diversify into other markets or products. This can help strategize for the future and present opportunities to expand your business or customer-base in the right situation.

Inflation has caused the price of just about everything to increase in recent years, resulting in many businesses passing increased expenses along to customers. While it is OK to increase your prices to offset expenses, it is vital to keep your products and services priced competitively to provide value to your customers. Building strong relationships in the community by being transparent with your customers can help as well as providing other incentives to offset rising prices.

Reviewing your inventory and profit margins can also help identify products that should be discontinued to cut expenses. Small business owners should aim to project price increases to meet the cost of goods sold six months out to protect their margins.

As part of the process of revisiting your strategies, it is also important to have contingency plans in place to handle various economic and business scenarios. This can help provide a sturdier foundation for your business in the future to deal with challenges.

Explore Your Borrowing and Saving Options

Rising interest rates have increased the cost of borrowing, but there are a variety of lending products that can help bridge gaps in cash flow and make other investments in the business. While it can be easy to focus on the interest rates, it is important to remember that return on investment (ROI) should be the primary factor for borrowing decisions.

Among just a few lending options:

• Small Business Lines of Credit: These can help with cash flow fluctuations for businesses dealing with seasonality, offset elevated inventory costs and more. Interest will only accrue on funds you utilize, which can provide costs savings compared to term loans.
• Small Business Administration (SBA) Loans: SBA loans, such as SBA 7(a), can be easier to qualify for than conventional loans and offer lower down payment requirements. These loans can be variable or fixed, offer long repayment terms and guaranteed backing by the government.

On the flip side, if your business’ cash flow and finances are in a good place, taking advantage of elevated interest rates through higher-interest deposit accounts can strengthen your business for the future by building a cash reserve. Build a cash reserve by setting aside a portion of profits to reserve for emergencies and to cover short-term cash flow gaps without resorting to expensive borrowing.

Money markets for small businesses typically yield higher interest rates than standard savings accounts while still providing quick access to your funds when needed – just ensure you check if there are withdrawal limits for your account.

While inflation and high interest rates have certainly made it more challenging for business owners, by taking a close look at your business and pricing strategies, contingency plans, borrowing and savings options, you can prepare your small business to help overcome future obstacles.