Small businesses are usually the most affected by inflation. This is because they have limited access to capital, bargaining power, and pricing power compared to larger corporations. Many small companies went out of business during the COVID-19 lockdown, and those who remained afloat barely made it through.
More recently, small business owners have had to contend with inflation driving up the cost of operations while also reducing consumer purchasing power. This has forced organizations to tighten their belts to ensure they don’t go out of business. However, there’s finally some good news on Main Street regarding inflation, and the recent economic data gives small business owners the confidence to keep going.
How Inflation Impacts Small Businesses in Particular
Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising, and each currency unit can buy less than it previously could. Inflation occurs when there is an imbalance between the supply of money and goods and services in an economy.
Inflation impacts every sector but significantly affects smaller businesses due to their limited resources to combat rising costs. In 2022, the National Federation of Independent Business reported that nearly 90% of small businesses stated that inflation unfavorably impacted their business.
Here are some ways in which inflation can impact small businesses:
Inflation often leads to an increase in the prices of goods and services. Small businesses, especially those operating on narrow profit margins, may struggle to absorb these rising costs. When overhead costs rise, small businesses are forced to either increase their prices, which could reduce customer demand, or find ways to cut expenses elsewhere, such as reducing staff or compromising the quality of their products or services.
Reduced Consumer Spending
As the general price level rises due to inflation, consumers’ purchasing power decreases. This can result in reduced spending on non-essential items, negatively affecting small businesses that rely heavily on discretionary consumer spending. Small retailers, restaurants, and entertainment venues may experience a decline in sales as consumers prioritize essential purchases.
Inflation can affect borrowing costs, including interest rates on loans and lines of credit. Small businesses that rely on external financing may face higher interest expenses, making it more expensive to expand operations, invest in new equipment, or undertake other growth initiatives. This can limit their ability to compete with larger enterprises with more substantial resources.
Inventory Management Challenges
Inflation can create difficulties in managing inventory for small businesses. If prices rise rapidly, companies may face challenges in accurately forecasting future demand and determining optimal inventory levels. Overstocking could lead to increased carrying costs and potential losses if demand doesn’t meet expectations while understocking could result in missed sales opportunities and dissatisfied customers.
Inflation can create wage pressures as employees seek to maintain their purchasing power. Small businesses may face challenges in offering competitive wages to attract and retain talent, especially if they are unable to increase prices or generate sufficient revenue growth. This can lead to higher labor costs and potentially impact profitability.
Good News for Small Businesses
Most people view inflation as the Big Bad, and it is easy to see why. If you had $300,000 in your savings account in 2005, that amount wouldn’t go as far in 2023. Inflation is always happening, so by understanding this, small business owners can find ways to cushion themselves during dire times.
The Federal Reserve tries to maintain a 2% inflation rate per year. This is because anything lower than that may weaken the economy. The inflation rate in June 2022 was 9.1%. The good news is that this number has been steadily decreasing since November, and the future looks somewhat brighter, especially for small business owners.
According to the Consumer Price Index, the inflation rate in November 2022 was 7.1%, and by the time the year was closing out, it had dropped even further to 6.5%. A June 2023 CPI report confirms inflation to have cooled to 3%, which offers some great news to small businesses especially.
Small business owners are seemingly optimistic about the economy, with 25% of companies planning for capital expenditures in the next 3–6 months. This is a 4% increase from 21% at the start of the year and a 6% increase from 19% following the March bank failures.
19% of small business owners from another survey said they intend to create new jobs in the coming three months. 40%, up from 34% last year, describe their current conditions as good, while 46% report they expect revenue to increase in the next year.
Bad News for Small Businesses
Despite the uptick in optimism, small business owners still view inflation, supply chain disruptions, and labor quality as their top concerns. While companies are hiring, an NFIB survey reported that 44% of owners were struggling to fill the reported job openings. 63% of owners said they were hiring in May, but nearly 90% said they couldn’t find qualified applicants for open positions.
Small business owners may also find themselves with another situation on hand as a UPS strike looms. With the contract between UPS and 340,000 UPS workers represented by the Teamsters Union expiring on July 31, employee pay remains a sticky point. Union workers account for over half of UPS’s workforce. Therefore, a strike could be devastating for the company and small businesses relying on the carrier.
The looming strike comes 25 years after a similarly larger strike by 185,000 workers brought the courier to a standstill. The strike, which lasted for 15 days, slashed package deliveries and put a strain on the US Postal Service and FedEx, who had to pick up the pace, effectively paralyzing businesses nationwide.
If a deal is not reached by the deadline, the strike will cause broader supply chain disruptions, and small business owners may need to find alternative ways to ship their last-mile deliveries to cope.
5 Tips to Help Small Businesses Mitigate the Impact of Inflation
Monitor and Adjust Prices
Regularly review your pricing strategy and assess the impact of inflation on your costs. Consider adjusting prices accordingly to maintain profit margins. However, it’s essential to strike a balance between maintaining profitability and remaining competitive. Communicate any price adjustments transparently with your customers to manage their expectations.
Analyze your cost structure and identify areas where you can reduce expenses or find efficiencies. Look for opportunities to negotiate better deals with suppliers, streamline operations, and optimize resource allocation. Implement cost-saving measures without compromising the quality of your products or services.
Explore alternative suppliers and sources for materials or inputs. This can help you mitigate the risk of supply chain disruptions and price fluctuations caused by inflation. Having multiple suppliers can provide flexibility and negotiation power, enabling you to secure better pricing terms.
Improve Inventory Management
Efficient inventory management is crucial during inflationary periods. Analyze your sales patterns, customer demand, and lead times to optimize your inventory levels. Avoid overstocking or understocking, as both can lead to financial losses. Consider adopting just-in-time inventory systems or implementing inventory management software to improve accuracy and responsiveness.
Enhance Customer Value
Focus on delivering exceptional value to your customers to retain their loyalty and justify your pricing. Identify ways to differentiate your products or services, such as improving quality, offering unique features, or providing outstanding customer service. Build strong relationships with your customer base and communicate the value proposition effectively.
Explore Alternative Financing Options
If inflation increases borrowing costs, explore alternative financing options. Seek out financial institutions or lenders offering competitive rates or consider alternative financing methods like crowdfunding or peer-to-peer lending. Maintaining a good credit history and financial records increases your chances of securing favorable financing terms.
Enhance Operational Efficiency
Continuously seek opportunities to improve your operational efficiency. This can include automating processes, investing in technology, cross-training employees, or optimizing workflows. By reducing waste and increasing productivity, you can mitigate the impact of rising inflation-related costs.
Stay aware of economic trends, inflation rates, and market conditions. Regularly monitor industry news, economic indicators, and government policies that may impact your business. Stay connected with professional networks and business associations to gain insights and access resources that can help you navigate inflationary environments.
While inflation continues to pose significant challenges, the recent economic data on inflation brings a ray of hope for small business owners. As small business owners, staying adaptable, proactive, and open to embracing new strategies and technologies that can drive resilience and sustainability is important.
If you’re a small business owner concerned about navigating the challenges of inflation, reach out to Brenden Kelley Law. Our experienced team of attorneys will provide the legal guidance and support you need. From reviewing contracts and leases to advising on pricing strategies and cost management, we have the expertise to help safeguard your business against the impacts of inflation. Don’t let uncertainty hold you back. Contact us today, and let us help you secure a brighter future for your small business.
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Small businesses play a vital role in driving economic growth and innovation. They are the backbone of local communities, providing employment opportunities and catering to the diverse needs of consumers. However, amidst the challenges and uncertainties of the modern financial world, accessing the necessary capital to start, expand, or sustain a small business has become increasingly difficult.
In addition, traditional lending institutions, such as banks, have tightened their lending criteria, imposing stricter requirements and scrutinizing applications more closely. According to Reuters, as of June 2023, the approval rate of small business loans was only 18.8% from small banks and 13.4% from large banks. But why are banks not willing to lend money to small businesses? This article will shed light on why it is getting harder for small businesses to secure loans from banks and the steps small business owners can take to secure financing.
Why Is It Getting Harder for Small Businesses to Secure Loans?
Securing small business loans has become more challenging due to several reasons:
- Stricter Lending Criteria: Traditional lending institutions like banks have tightened their lending criteria. This is in response to the global financial crisis and subsequent regulatory reforms. They now conduct more thorough assessments of loan applications, focusing on creditworthiness, business stability, and collateral requirements. Also, this increased scrutiny makes it harder for some small businesses to meet the stringent criteria and qualify for loans.
- Economic Uncertainty: Uncertain economic conditions make lenders more cautious about extending loans to small businesses. These include market volatility and changing consumer preferences. Additionally, lenders may perceive higher risks in uncertain times, making them more conservative with their lending practices.
- Limited Financial History: Small businesses, especially startups, often lack a robust financial history or a track record of profitability. This absence of substantial financial data makes it challenging for lenders to assess the business’s creditworthiness and repayment capacity, thereby reducing the likelihood of loan approval.
- Collateral Requirements: Many lenders require collateral to secure small business loans. This can be a significant barrier for businesses without substantial assets. Lack of collateral or insufficient collateral value can also hinder loan approval or result in unfavorable loan terms.
What Can Small Business Owners Do?
It may be increasingly difficult to obtain financing for your small business, but the money is still out there. With the right strategies, small business owners can increase their chances of securing funding.
Strengthen Personal and Business Credit
Maintaining a strong personal and business credit history is crucial. According to a Goldman Sachs Survey, 70% of small business owners confirmed that their personal credit was considered when they applied for a business loan. Moreover, a score above 700 increases one’s chance of securing financing and vice versa. Small business owners should focus on building and maintaining good credit scores. Pay bills on time, reduce outstanding debt, and manage credit responsibly.
Prepare a Solid Business Plan
Creating a comprehensive business plan that outlines the company’s objectives, market analysis, financial projections, and repayment strategies demonstrates professionalism and commitment to lenders. A good business plan typically needs to include a summary of your business, products or services offered, market, and financials.
If you’re unsure of how solid your business plan is, it’s advisable to talk to a business plan expert or a business attorney who will review it and offer feedback on the necessary changes. You also need to be able to explain how you intend to use the money. Demonstrating a grasp of finances and a plan fosters confidence in lenders about our ability to effectively use funds.
Build Relationships With Lenders
Establishing relationships with local lenders or community banks can be beneficial. Engaging in regular communication, attending networking events, and building rapport with lenders can increase the likelihood of loan approval as they gain a better understanding of the business and its potential.
Consider an SBA Loan
An SBA loan is a loan program offered by the US Small Business Administration. The SBA does not directly provide loans to businesses but instead guarantees a portion of the loan amount (usually 85%) issued by approved lenders, such as banks and credit unions. This guarantee reduces the risk for lenders, encouraging them to provide loans to small businesses that may not meet conventional lending requirements. Section 7(A) and 504 are the most popular loan programs because they allow small businesses to borrow up to $5 million.
Explore Alternative Funding Sources
Traditional bank loans are not the only option for small businesses. Exploring alternative financing avenues such as online lenders, angel investors, community development financial institutions (CDFIs), microloans, or government-backed loan programs can offer additional opportunities to secure funding.
You can also consider bad credit loans or short-term loans. Lenders offering bad credit loans do not always consider bad credit when providing financing options. In such instances, they’ll consider cash flow and bank statements to determine eligibility. Short-term loans are usually offered by online lenders and are generally repaid within a year or less.
Optimize Financial Records
Maintaining accurate and up-to-date financial records is essential. Lenders often require detailed financial documentation, including balance sheets, profit and loss statements, and cash flow statements. Every document helps assess your risk level and determine whether loaning you money is a sound decision. Organized and transparent financial records instill confidence in lenders regarding a business’s financial health.
Seek Expert Guidance
Engaging with small business development centers, financial advisors, or industry-specific mentors can provide valuable insights and guidance throughout the loan application process. These experts can help identify suitable financing options and navigate the complexities of securing loans.
Talk to other people who have been through the loan application process and gotten approved. Also, find out what they did to secure financing. Their insight may be able to help you determine aspects of the application you may have missed.
While the process of obtaining small business loans has become more challenging, entrepreneurs can adapt by understanding the reasons behind the increased difficulty and employing strategic approaches. Adapting to the evolving loan landscape and proactively exploring various options will enable entrepreneurs to overcome obstacles and fuel their business growth and success. If you need help starting your business or are looking for invaluable guidance and legal protection as you start your business, look no further than Brenden Kelley Law. Contact us today to schedule a consultation.
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As a small business owner, there are many legal considerations that you will need to be aware of in order to protect your business and your personal assets. Here are the top 5 tips that a lawyer can give to a new small business owner:
5 Tips for Small Business Owners:
- Choose the right business structure: The type of business structure that you choose will have a significant impact on not only on the legal aspects of your business, but also the financial. There are several types of business structures to choose from, including sole proprietorship, partnership, limited liability company (LLC), and corporation. Each type of structure has its own advantages and disadvantages, so it is important to consult with a lawyer to determine which structure is best for your business.
- Understand your obligations under the law: As a small business owner, you will have a number of legal obligations that you need to be aware of, such as compliance with labor laws, taxes, and other regulations. It is important to consult with a lawyer to ensure that you understand your obligations under the law and that you are in compliance with all relevant regulations.
- Protect your intellectual property: Small business owners often have valuable intellectual property assets that need to be protected, such as trademarks, patents, and copyrights. A lawyer can help you to understand the different types of intellectual property and how to protect them, as well as how to register your intellectual property so that it is legally recognized.
- Create a strong contract: Contracts are an essential part of any business, and it is important to have a lawyer review all of your contracts to ensure that they are legally binding and enforceable. A lawyer can also help you to understand the terms and conditions of your contracts, and can help you to negotiate any disputes that may arise.
- Have an exit strategy: Starting a small business is a significant investment of time and money, so it is important to have a plan for exiting the business if things do not go as planned. A lawyer can help you to develop an exit strategy that will help you to protect your assets and your business in the event that you need to close or sell your business.
In conclusion, starting a small business can be a challenging and daunting task, but with the right legal advice, you can protect your business and your personal assets. By following these top 5 tips, you can ensure that your small business is legally compliant and that you are well-prepared for any legal challenges that may arise. If you are thinking of starting a small business, it is important to consult with a lawyer who can help you to navigate the legal landscape and to ensure that your business is successful. Contact the Brenden Kelley Law team at 216-644-3359 today.
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Starting a business in Ohio can be a rewarding and exciting venture, but it can also be overwhelming and challenging. There are many steps to take and decisions to make, and it’s important to be well-informed and prepared in order to set your business up for success.
Here are 7 steps to consider as you begin starting a business in Ohio:
- Choose a business structure: One of the first decisions you’ll need to make is what type of business structure you want to have. The most common options in Ohio are sole proprietorship, partnership, limited liability company (LLC), and corporation. Each has its own advantages and disadvantages, so it’s important to consider your needs and goals before making a decision.
- Obtain any necessary licenses and permits: Depending on the type of business you are starting, you may need to obtain various licenses and permits in order to operate legally in Ohio. This can include things like a sales tax permit, food service permit, or liquor license. It’s important to research what licenses and permits are required for your specific business and to obtain them before starting operations.
- Create a business plan: A business plan is a detailed document that outlines your goals, strategies, and financial projections for your business. It helps you identify your target market, define your competitive advantage, and set measurable objectives. A business plan is an essential tool for any small business, as it helps you stay organized and focused on your long-term goals.
- Secure financing: Most small businesses require some form of financing to get off the ground. This can include loans, grants, or investments from friends and family. It’s important to research your financing options and create a financial plan that outlines how you will use the funds to grow your business.
- Choose a location: The location of your business is an important consideration, as it can impact things like foot traffic, rent, and access to customers. It’s important to research different locations and consider factors like parking, foot traffic, and proximity to your target market.
- Set up your business: Once you have chosen a business structure and secured financing, it’s time to set up your business. This can include things like choosing a business name, creating a logo, setting up a website, and purchasing any necessary equipment or supplies.
- Market your business: Marketing is an important aspect of running a small business, as it helps you attract and retain customers. There are many ways to market a small business, including social media, email marketing, and local advertising. It’s important to find marketing strategies that work for your specific business and to consistently promote your products or services.
Careful planning and preparation.
Starting a small business in Ohio requires careful planning and preparation, but with hard work and dedication, it can be a rewarding and fulfilling experience. It’s important to stay organized and focused on your goals, and to seek out resources and support as needed. With the right approach, you can successfully launch and grow your small business in Ohio. Please call Brenden Kelley Law at 216-644-3359 so that we can assist you starting your small business.
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Starting a small business in Ohio can be a challenging but rewarding endeavor. One important aspect of running a small business is understanding the various types of contracts and agreements that you may encounter. These legal documents can help protect your interests, establish clear terms and conditions, and ensure that you are able to operate smoothly and efficiently.
Here are five common types of contracts and agreements that small businesses may encounter:
- Employment contracts: If you are hiring employees, it is important to have a written employment contract that outlines the terms and conditions of their employment. This can include details such as salary, benefits, job duties, and the duration of the employment relationship. Employment contracts can help protect both the employer and the employee by clearly defining the expectations and responsibilities of each party.
- Lease agreements: If you are renting a space for your business, you will need to enter into a lease agreement with the landlord. This document will outline the terms of your tenancy, including the duration of the lease, the amount of rent, and any other terms and conditions that apply. It is important to carefully review a lease agreement before signing to ensure that it meets the needs of your business.
- Service contracts: If you are providing a service to your customers, you may enter into a service contract that outlines the terms of the service being provided. This can include details such as the scope of the service, the payment terms, and any guarantees or warranties that apply. Service contracts can help protect both the provider and the customer by setting clear expectations and establishing a clear resolution process if there are any disputes.
- Supply contracts: If you are purchasing goods or materials from a supplier, you may enter into a supply contract that outlines the terms of the transaction. This can include details such as the quantity of goods being purchased, the price, and any delivery or payment terms. Supply contracts can help ensure that you receive the goods you need in a timely manner and at a fair price.
- Non-disclosure agreements (NDAs): If you are sharing confidential information with someone, you may want to enter into a non-disclosure agreement (NDA) to protect that information. NDAs can be used to prevent the disclosure of trade secrets, business plans, or other sensitive information.
Contact a lawyer before signing a contract.
It is important to carefully review any contract or agreement before signing to ensure that it meets the needs of your business and protects your interests. If you have any questions or concerns about a contract or agreement, it is a good idea to seek the advice of an attorney. Please call Brenden Kelley Law at 216-644-3359 so that we can assist you.
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