This June, the Consumer Price Index (CPI), which is the measurement used by the US Bureau of Labor Statistics to track inflation, hit a 9.1% year-over-year increase. That’s the highest it’s been since 1981. Consumers are certainly feeling the crunch with high food and fuel prices, and small business owners are dealing with rising costs for materials, inventory, and overhead.
One of the best defenses small businesses have in this economic environment is increased cash flow. Using a line of credit to combat inflation could help cover outstanding expenses, allow you to order supplies in bulk, or boost revenue-producing marketing efforts. We’ve incorporated each of these into the three “inflation business plans” below.
Plan #1: Pay all expenses and build an emergency fund
This is the most defensive of the three plans listed here. Use a line of credit to cover all outstanding expenses and build an emergency fund to protect against potential losses if the situation gets worse. What your business is doing here is turning short-term liabilities into long-term liabilities, spreading out those expenses over a longer period.
A variation on this plan is to simply set up the business line of credit and have it in reserve for emergencies. Leave expenses where they are and cover them to the best of your ability with current revenue. Inflation will eventually ease and costs will go down, or at least stop going up. Until then, the line of credit is available to keep your business solvent.
Plan #2: Use cash leverage to renegotiate with suppliers
Everyone needs cash flow, not just your business. The second recommended course of action here calls for renegotiating with suppliers to get better pricing in return for cash terms. A line of credit for inflation gives your business the ability to buy supplies in bulk, which usually involves cost savings. This won’t solve supply chain problems, but it will give you better pricing on items you’re already getting.
The variation here is in materials purchasing. Many companies have needed to discontinue certain product lines because materials are simply not available. If you do that, boost materials purchases for other product lines and build your inventory. Prices will continue to go up for a while, so it can’t hurt to build a surplus for tomorrow while paying today’s rates.
Plan #3: Increase spending on high-ROI marketing campaigns
You can fight inflation with a line of credit by spending on marketing campaigns that have already produced a decent return on investment (ROI). This is the most aggressive of the three plans, and focuses on boosting your sales as opposed to simply bunkering up and riding it out until things improve. The line of credit gives you the funds to do that, and your marketing data will provide you with insights on where the money will be best spent.
There’s no variation here. The businesses that will be most successful during these trying economic times will likely be the ones that spend money to make money. You may not be able to do that using just current assets, but a business line of credit can provide the funding necessary to increase revenue and beat inflation.