Inflation is beginning to take a little-noticed but major toll on the small business economy, according to a new survey by the U.S. Chamber of Commerce, which found 67% of the companies it surveyed have raised prices, 41% have decreased staff, and 39% have taken out a loan.
One in three of America’s small business owners now ranks inflation as their top concern, up from 23% a quarter ago, and 85% are worried about rising prices, according to a survey by the U.S. Chamber of Commerce.
“Many small businesses are in peril of being crushed by inflationary pressures,” said Andrew Sherman, partner at Seyfarth Shaw LLP and author of Raising Capital: Get the Money to Grow Your Business. “Especially when coupled with supply chain risks, rising interest rates, unstable capital markets and geopolitical risks. The small businesses that are most vulnerable will be the ones with the weakest pricing power, such as the sale of commodities or easily replaceable products or services, or where the overall value proposition to the customer is weak.”
Though most of the media attention has focused on the impact of inflation on consumers, inflation, combined with policy changes to combat it, can combine to create a whipsaw for small businesses. In February, the Consumer Price Index rose to 7.9%, the highest level in 40 years. The Federal Reserve on March 16 was expected to announce a .25% rate increase with more expected to follow this year.
Small business owners do not have the resources, economies of scale or the pricing power of large corporations. Inflation is expected to make the pandemic rebound on Main Street harder in the months ahead as rising interest rates, supply chain disruptions and increasing energy prices — exacerbated by the Ukraine Russian War — worsen the situation.
Restaurants and retailers are particularly vulnerable to rising prices. In a rising interest-rate environment, companies in the automobile and housing sectors are vulnerable to increases that affect consumer behavior – even as the Federal Reserve will be trying to slow-roll the changes to cushion the economy.
New forms of finance and financing technology, including apps that extend customers’ purchases over months, add another element of the unknown.
Just as the problem is multi-faceted, there is no one-sized-fits-all approach to combatting it.
One Company’s Successful Tactics
Meghan Fabulous, a woman’s fashion brand, turned to automation, at the same time it brought some of its production closer to home.
It has automated its inventory and shipping procedures using Cin7 software so it can offer drop shipping to its large department store customers that include Nordstrom.
“This has helped us save on human costs, while providing scale and operating leverage,” says Steve Dunlap, CEO of Meghan Fabulous. As he explains, offering this service has helped the company snare new customers this year including Saks Fifth Ave. and Lord & Taylor.
Now Meghan Fabulous is looking for ways to reduce its inventory storage costs. It is in discussions with its manufacturers in India and China to store its products near their facilities overseas. “It’s a very cheap alternative and the factories like the idea of getting larger orders and then shipping the goods to us when we need them. For us, buying more inventory in advance is another way to guard against rising inflation.”
At the same time, the company is circumventing logistics nightmares by manufacturing some of its garments in Los Angeles, near its home base. “Shipping delays have been terrible. We placed an order over $100,000 with our Indian factory for dresses last August and we received them in January,” says Dunlap.
So far, the apparel maker is seeing very positive results. Despite inflation and supply chain disruptions revenues in 2021 rose nearly 140% to a little less than $2 million. This year revenue continues on an upward trajectory, the company said.
67% Have Raised Prices
To gauge the severity of the problem, the U.S. Chamber of Commerce conducted a national small business survey in partnership with MetLife. Released March 3, the study, entitled the “Special Report on Inflation and Supply Chain Shocks on Small Business,” revealed that 85% of small businesses are concerned about the impact of inflation on their business, up from 74% in Q4 2021. One in three now rank inflation as their top concern, jumping 23% from last quarter, followed by supply chain disruptions (26%).
Some 750 small business owners representing a wide swath of industries participated in the study, conducted Jan 14-26. All participants had 500 or fewer employees.
“Wage costs are rising due to the labor shortage; and supply chain disruptions have raised the cost of goods,” said Tom Sullivan, vice president of small business policy at the U.S. Chamber of Commerce. “It has made the hurdles business owners are constantly trying to jump over even higher,”
Businesses in all industry sectors in all parts of the nation have been affected, though Sullivan noted that manufacturers reported the most concern. That’s could be of particular interest as political pressure grows to bring more manufacturing back to the United States.
Wage Inflation is a Problem on Main Street
But inflation has been a problem that’s been brewing even before the pandemic hit, Sullivan points out. It started before January 2020 with a shortage of qualified workers and magnified 100-fold as soon as the Covid crisis hit the nation, he notes.
Now, the labor shortage and wage inflation is a big factor fueling the crisis. Though workers’ new bargaining power has been heralded as a long-overdue shift in the balance of power between large corporations and workers, small businesses are also getting caught in the crunch. The National Federation of Independent Businesses reports that 48% of small businesses have job openings, and of those 93% are having difficulty finding qualified candidates.
Stoian Genoff, the co-owner of La Crème Café, a small chain of cafes in Beverly Hills, West Hollywood and Sherman Oaks, California, with $2 million in annual sales, has experienced this firsthand. “Right now finding experienced employees who will accept reasonable wages is my biggest problem,”Genoff says. “People have gotten used to high unemployment benefits and many don’t want a job for less than $23 an hour.”
To get around the problem, he hires inexperienced workers willing to accept lower wages, and trains them.
He now employs seven full-time workers and two part-timers. Prior to the pandemic he had a staff of 11 full-time employees.
The restaurateur, who is an immigrant from Bulgaria, says he’s no stranger to adversity. He weathered the economic lockdowns due to Covid-19 with the help of $200,000 in PPP loans under the Paycheck Protection Program, now he taking out a $100,000 line of credit to maintain his menu prices so he doesn’t lose customers. Over the last two years he has watched his profit margin shrink 36% due to the cost of wages (up 20%), products (up 10%) and rent (up 6%).
As he explains, his business is based on high-quality organic food and beverages so he cannot cut corners on the products he buys, nor can he raise prices at a time when inflation is hurting his customers. It is a catch-22 situation.
Survival and growth strategies
According to Matthew Stratman, a small business financial advisor at Western International Securities, “This is a good time to shore up capital if you need it to grow your business before interest rates go up. Many banks and alternative lenders are eager to lend to small businesses. Locking in a fixed-rate loan or line of credit is a good cash cushion.”
Alternative finance is another option small businesses are turning to, especially those whose credit ratings have suffered during the pandemic. David Gens, president and CEO of Merchant Growth, an online small business finance company, says his firm offers such products as ecommerce financing, where data on ecommerce sales are used for credit verification, and flex financing where repayments are made during a business’ high sales season when cash flow is available. “For those having a tough time getting financing these are tools that can help.” Last year, he launched a company called Tabit, a buy-now—pay-later point-of-sale credit management system.
Sherman says during times of inflation there are strategies small business owners can employ to get them through tough times. Here are four he recommends:
Join purchasing groups
A purchasing group is a group of businesses or organizations that have banded together to get economies of scale and increase their purchasing power with suppliers.
Opt for vendor finance
Some vendors are willing to finance purchases of their products for customers in the form of deferred loans that offer longer repayment terms for inventory. Some vendors will support their long-standing customers with this form of finance. If not, shop around for an alternative supplier who is willing to offer vendor finance if you switch to their brand.
Redefine the relationship with the customer
Now is the time to rethink your product and service offerings to customers to see how you can unbundle, or repackage them to get better pricing.
Stockpile inventory
Supply chain disruptions and rising cost of goods and commodities has prompted business owners to rethink their inventory strategies. More entrepreneurs including Genoff are now making advanced purchases of the goods and products they need to lock-in prices before they inch higher. Then they are stockpiling inventory in storage.
