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Should you take out a business loan to deal with ongoing inflation?

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Author: Matt Tilton, President of Commercial Lending at Centrust Bank

Inflation affects both consumers and businesses across the board. It is also important to note that manufacturers and sellers are likely to pass on the rising costs to consumers through higher retail prices.

Businesses can only cope with the effect of rising prices and spikes in operating costs by having cash on hand. However, even these solutions can tide them over only for a time. Beyond which, they will need additional capital support.

This is where business loans come in. While they can provide immediate financing and help businesses stay operational, there are certain caveats to consider as well – especially for small businesses. It might seem like these issues have been caused by the fallout of the pandemic and global tensions, but over the last couple of years, business owners have had to contend with consistently rising prices of goods and raw materials, as the market had been plagued by shortages. Some industries and businesses have been disproportionately impacted by this due to their over-dependence on imported materials. Inflation, and its consequences, can have various effects on the operations of a business.

At Centrust Bank we are very close to our clients, and through our discussions, the challenges vary at different times, but usually manifest as:

  • Increased business expenses
    • As the prices of raw materials increase, so do production and operation costs.
  • Reduced demand and sales
    • When costs go up, non-essential goods and services take a hit – which means lower sales for many businesses.
  • Cash flow issues
    • As demand dries up and order pipelines dry up, businesses – especially small ones – are likely to experience cash flow issues and even struggle to keep operating.
  • Lower profit margins
    • Overall, these factors result in lower turnover and profit margins for business owners. It really impacts the overall health and viability for businesses.

The ability to deal with the ebbs and flows of business with cash on hand is essential. A loan can help fund operations, ease the cash flow burdens, and deal with emergency expenses (because we know there have been lots of emergencies in the last few years). Businesses can also use the funds to buy up inventory and make sure they are not caught off guard with a shortage of raw materials and finished products. Stocking up in advance can help mitigate rising costs. Funds can also be used to expand a businesses’ customer base. A larger base could mean that even reduced demand will not result in a complete halt in sales. Funds could help with marketing, outreach and perhaps even expand to another location!

Another way funds could help is investing in technology solutions that help ultimately lower costs and improve the customer experience. We have worked with several clients that used to have manufacturing overseas, and are working to buy equipment so they can perform what is needed state-side and in-house.

These are all great ways to use proceeds from a business loan.

Factors to consider before a business decides to take out a loan to address inflation concerns

The first consideration is – Are you eligible for a loan? Lenders have various criteria when it comes to approving business loans. It is important that you deal with a knowledgeable banker who can see the big picture of your business and advise you on your eligibility for various loan programs and the fit for your business. Failed applications can adversely impact your credit score, so wisely choose a banking partner that will find a way to work with you and say yes.

Secondly, is to decide if the proceeds from a loan will tide you over. Inflation is cyclical – so the chance is that your company’s finances will recover over time. But you need to consider the payback timelines. If the issue is truly inflation, a business loan may be the answer. However, if the issues run deeper, a loan may not be the answer. A good banking partner, who has the benefit of benchmarking lots of businesses, may be able to help you figure this out.

Lastly, should you consider refinancing or a top-up loan an option? If you have an existing business loan, you can choose refinancing as an option instead of taking an additional loan. Some lenders will also let you take a top-up loan to cover any unexpected expenses on top of your existing loan.

Always surround yourself with good advisors. Businesses should pull their banker close and keep them informed of changes in the business. Businesses have had to be very creative navigating change in the last several years. Bankers have also had to be creative. Communicate with your banker in good times and in bad. Let them help you and advise you as part of a team; you should always be cultivating a relationship of good counsel.

Disclaimer: Information provided here is not investment, tax or financial advice. You should always consult with a licensed professional for advice concerning your specific situation.

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