High inflation rates & small businesses

Since early 2022, inflation has become a persistent issue in the UK, with widespread news coverage and experts making predictions of what may happen next. It has led to a series of interest rate rises from the Bank of England, and many business owners see it as the biggest challenge facing them today. Here we look at inflation in more detail, and steps you can take to manage it’s impact. 

What is inflation?

Inflation refers to the rise in the average level of prices in an economy over time. It affects the purchasing power of individuals and businesses, as the same amount of money will buy fewer goods and services. Inflation can be caused by macroeconomic factors such as increased demand, rising production costs, supply chain disruptions, or changes in monetary policy.

While some level of inflation is considered normal and even healthy in a thriving economy,, high inflation rates pose significant challenges for businesses, particularly those with limited resources and smaller profit margins.

Why is inflation rising?

The rise in inflation rates can be attributed to various factors. Expansionary monetary policies, such as low interest rates, and increased money supply, are often implemented to stimulate economic growth. While these measures can boost spending and investment, they can also lead to inflationary pressures.

Supply chain disruptions, global economic events, geopolitical factors, and rising commodity prices can also contribute to upward inflationary trends. These factors, when combined, create a challenging environment for small businesses to operate in.

What does rising inflation mean for businesses?

For small businesses, the implications of rising inflation can be multifaceted and incredibly complicated. 

Increased supplier costs can make it more difficult to maintain operations on existing budgets. That can mean either reduced profit margins, cutting back services, or facing the difficult choice of passing the costs on to customers. 

This can be particularly problematic if costs change mid-contract, leading to negotiations with both clients and suppliers. 

Inflation can also impact employee wages, with staff asking for higher pay rises in order to keep up with living costs. It may also affect demand, as people cut their spending to save money.

How can small businesses deal with inflation?

In light of these challenges and the current state of rising inflation in the UK, small businesses can develop strategies to effectively manage its impact and mitigate its adverse effects.

Here are some options to consider:

Review pricing strategies

Analyse your existing cost structure and consider adjusting prices to reflect your increased expenses. To avoid alienating your customers, being upfront and communicating price changes transparently can help.

Bulk buy or order in advance 

If inflation stays high, prices will continue to go up, so the more business costs you can lock in at today’s prices, the better. Suppliers will often provide discounts for bulk buying too. If you need extra capital to pay up front, a business loan or line of credit can help.

Evaluate supply chains

Assess the vulnerabilities in the supply chain and explore alternative suppliers or negotiate more favourable terms with your existing suppliers. They may be stretched just as you are right now, and won’t want to lose you as a customer, so try to find an arrangement that works for both parties. 

Increase operational efficiencies

Look for ways to further streamline your operations, reduce waste, and optimise resource allocation. This can help offset rising costs and maintain profitability without requiring any additional spending.

Monitor cash flow

Keep a close eye on cash flow management, ensuring invoices are being paid promptly and negotiating payment terms, where possible.

Keep on top of your budget

Have a budget that accounts for potential inflationary impacts. Regularly review and adjust the budget as needed, and speak to an accountant or financial advisor if you want extra advice.

Diversify revenue streams

If your core activity is highly susceptible to the effects of inflation, could you branch out into other areas that can provide a more stable revenue stream? Or if you expanded your customer base, could you benefit from economies of scale? Growing your business can make it more resilient to external pressures, so consider your options for new activity. 

How Funding Circle Can Help

At Funding Circle we offer a variety of products that can help businesses deal with inflation, from business loans to short term lending.

Funding Circle business loans

Borrow from £10,000 to £500,000 over up to 6 years. All loans are fixed rate and come with no early settlement fees. 

Asset finance

Borrow up to £5 million to fund new equipment, vehicles, machinery or other assets through our partners.

FlexiPay

Spread the cost of business bills, invoices and more over 3 months with a flexible line of credit of up to £250,000.

06/07: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.