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Small-business owners have spent years trying to combat the effects of the COVID-19 pandemic, and now inflation has thrown a wrench into the progress of recovery. Four out of five businesses report that rising prices have had a significant impact on their operation, according to the U.S. Chamber of Commerce’s Q2 2022 Small Business Index.
And although companies have addressed inflation concerns in a variety of ways, the Q2 2022 Index reports that 46% of business owners surveyed have taken out a loan to cover rising costs, compared with 39% in the first quarter.
If you’re considering a business loan to deal with inflation, use these three tips to help you through the process.
How Much Do You Need?
1. Understand your finances
Getting a small-business loan may seem like a logical way to combat inflation challenges, such as increased expenses and cash-flow gaps.
Before you start searching for funding, however, you should ask yourself: Can my business afford to take on debt? How can a potential loan benefit my operations — now and in six months?
If you’re considering a business loan, you should know exactly how much cash is flowing in and out of your business each month, your core operating costs, seasonal revenue trends and any other factors impacting your cash flow, Zoe Newman, U.S. managing director of Capital on Tap, a business credit card provider, said in an email.
Understanding your finances can help you project the potential impact of loan funds and repayments on your business, Newman said.
This evaluation can also allow you to determine whether refinancing debt is a viable option. “Given the rising interest rate environment, it’s an excellent time for small-business owners to refinance any variable-rate debt they have into a fixed interest rate,” Mike Rozman, CEO and co-founder of BoeFly, said via email. BoeFly is a fintech company that specializes in franchise financing.
If you can refinance a variable-rate loan into a fixed-rate loan, you’ll protect your business from any interest rate changes in the future.
2. Find the right lender
As the Federal Reserve has increased interest rates in 2022, banks have been tightening their business loan requirements. To access financing, small-business owners may have to compare lenders to find the right option.
Start your search with a financial institution where you have a relationship. “The more business you have done with the financial institution, the more likely they are to know your company and be willing to work with you to find the best solution,” Sam Brownell, founder of Stratus Wealth Advisors, a small-business financial planning company, said in an email.
Brownell also recommends looking beyond large financial institutions and considering regional or local banks, credit unions or other lenders that cater specifically to business customers.
Interest costs may not differ greatly, but a lender that gets to know your small business and can help you solve problems — as opposed to just selling you products — is a worthwhile long-term partner, he said.
Similarly, you might explore community development financial institutions, or CDFIs. These organizations typically focus on lending to traditionally underserved businesses and those in low-income communities. CDFIs often offer business-development services — and their loans may be easier to qualify for.
3. Reexamine your operations and plan for the future
Small-business owners can employ additional financial strategies to fight against inflation — whether or not they decide to get a loan.
You can reexamine the way your business operates and determine if there are opportunities to increase efficiency and cut costs. You can think about where your company is most successful — and consider if there are ways to build on your success, or even create something new.
Every economic rough patch comes with an opportunity for innovation, Newman said.
“While most businesses attack the problem by just trying to keep afloat on a shoestring budget, those who are able to pivot fast to identify and address the new customer needs that come out of a changing climate have a real opportunity to grow,” she said.
Additionally, it can be beneficial for business owners to work with a certified public accountant or another financial expert to update their records and discuss financial plans for the future.
If you’re applying for a business loan, these experts can help you get organized and prepare a strong application. And even if you’re not looking for financing, they can offer advice on the best financial strategies to save on expenses and grow your bottom line — putting your business in a better position to combat any other economic challenges that may arise.