7 Ways to Protect your Small Business from Inflation

The Consumer Price Index increased 6.8 percent from November 2020 to November 2021, according to the Bureau of Labor Statistics, the largest 12-month increase since the period ending June 1982. Although no one knows how high inflation will be in 2022, most economists agree that it will continue to rise. So, if you know something […]

7 Ways to Protect your Small Business from Inflation

by | Jan 11, 2022 | Payment Pilot | 0 comments

The Consumer Price Index increased 6.8 percent from November 2020 to November 2021, according to the Bureau of Labor Statistics, the largest 12-month increase since the period ending June 1982. Although no one knows how high inflation will be in 2022, most economists agree that it will continue to rise.

So, if you know something is going to happen ahead of time, doesn’t it make sense to prepare? My most astute clients are already implementing these seven strategies to navigate their businesses through the inflationary environment of 2022.

Put any extra money into interest-bearing accounts.

For as long as many of us can remember, interest rates have been so low that it didn’t matter whether we kept our money in a regular or interest-bearing checking account.

However, the environment is changing. The Federal Reserve is expected to raise federal funds rates (the rate at which commercial banks borrow and lend excess reserves to one another overnight) three times in 2022, with rates rising to 2.1 percent by the end of 2024.

That’s far from the levels seen in the early 1980s, but it’s still significantly higher than we’ve seen in the last decade. Although this raises borrowing costs (see below), it will eventually result in higher payouts on interest-bearing assets. This will most likely take some time, but as interest rates begin to rise, you should make it a habit to start putting extra money into interest-bearing certificates of deposit, money market and savings accounts, and even some bond funds because the earnings will begin to matter.

Debt refinancing

At the moment, mortgage rates are around 3%, and interest rates on a typical bank loan range from 2.5 percent to 7%. However, rates will rise in 2022. So now is the time to lock in lower rates and refinance your short-term debt into a longer-term loan.

Pay off your variable, high-interest credit card debt or transfer the balance to a card with a lower interest rate. Even better, refinance this debt into a longer-term loan with lower, fixed interest rates, even if it means taking out a second loan on an asset such as your home or business property.

Consider a Section 7(a) fixed-rate loan from a Small Business Administration (SBA) banker if your company is eligible. You can borrow up to $5 million for working capital or to refinance existing business debt.

Price increases should be done strategically, and ‘shrinkflation’ should be considered.

Avoid broad price increases and instead focus your price increases on specific product lines where your margins are most affected and customers are most likely to be accommodating. Some of my clients, like many large corporations, practice “shrinkflation,” or providing slightly less product or service for the same price.

Make long-term commitments.

If your suppliers are willing, make a longer-term supply agreement. If your landlord wants to keep you as a tenant, negotiate a longer lease with agreed-upon, fixed increases. The same is true for higher-paid employees: try to secure your relationship with a contract.

These changes will assist you in better managing your cash requirements by giving you more control over your significant fixed costs over the next few years, allowing you to better budget and manage your cash.

Purchase inventory, real estate, and equipment.

Have you ever heard of the phrase “buy low, sell high”? The most astute clients aren’t waiting for prices to rise. Those with access to capital and bank loans are purchasing the core materials they require for their businesses now in anticipation of cost increases in 2022.

People are also investing in real estate and equipment, which have a track record of keeping up with rising costs during inflationary periods. Do you need money to do this? Look into the SBA loans.

Spend money on technology.

In these inflationary times, businesses are doubling down on technology spending in order to get more work done with the same or fewer people while keeping overhead under control.

They’re investing in robotics for their factories, self-service kiosks for their stores and restaurants, radio-frequency identification and bar coding systems for inventory control, and artificial intelligence-driven automation so that questions can be answered and workflow can be completed without the need for human intervention.

Consult with your software and technology partners to determine what is affordable for your company.

Examine your investments again.

Like most small-business owners, you’ve probably saved money in various stock, bond, and asset accounts. Now is the time to consult with your financial advisor.

Depending on your risk tolerance and income, it may make sense to shift some of your investments into commodities such as gold and silver, which have historically performed better during inflationary times — though these carry more risk and may not always be your best option.

Increasing your holdings in large-cap equity funds may be a good idea because the profits generated by well-managed companies (the stock of which these funds own) tend to keep up with rising costs.

Some people have inquired about TIPS (Treasury Inflation Protected Securities), which are issued and backed by the United States government in the same way that traditional Treasury bonds are, but come with inflation protection.

Again, don’t do this on your own; instead, consult with your financial adviser to determine the best mix of investments for you based on the risks you’re willing to take.

Payment Pilot is ALWAYS open to answer your questions. So, don’t hesitate to call us at 704-464-0394 or email us at [email protected] for your questions or concerns.