Imagine this. A bottle of water that used to cost $1 is now $1.05, thanks to 5% inflation. Apply this on all goods and your shopping list will cost you twice or more of what it used to be. What will happen to your purchasing power then? How adversely will inflation affect someone’s cost of living? The only thing worse than this would be prolonged inflation, which is a formidable foe that has plagued economies worldwide by dragging all entities into the trenches.
While the turbulent tides of an economic fluctuation as such affect everyone alike, they have always been harsher on small-scale businesses (SMEs). To put simply, a persistent rise in the general price levels ensued by an increased cost of living is what inflation is. While inflation feasts on various sectors, small enterprises face an uphill battle trying to grapple with increasing operating costs, shrinking profit margins, and uncertain economic conditions.
Many blame the Covid-19 pandemic for the recent inflation spike that many nations are battling right now. Others say that it is the Russian invasion of Ukraine that struck the economy with a massive shock and left it with an irreversible aftershock. The rest believe that it is a toxic melange of chronic economic conditions. Eitherway, irrespective of what revived inflation on this large of a scale, SMEs seem to be the ones caught in the crossfire.
SMEs hit rock bottom because of prolonged inflation
The soaring energy and food prices hand-hand-hand with rising interest rates, global supply chain holdups and a tight labour market have contributed to creating a cocktail of a drawn-out cost-of-living crisis that is affecting small-scale businesses in the worst possible way. In a situation as such, SMEs must be privy to inflation’s impact for their survival and growth. Because it is always better to know your enemy inside out.
One of the worst outcomes of inflation is the rising cost of essential goods and services. During inflation, overhead costs such as raw materials, labour, utilities, and other inputs will spike. Escalating operating costs as such makes SMEs vulnerable owing to their limited resources and purchasing power.
Ensuing higher costs of services and goods, the cash SMEs have in hand will plummet faster than they can fathom. In comparison to large-scale businesses that have access to massive savings accounts and an ample amount of capital markets, inflation hits SMEs’ bottom line. Which will ultimately force them to react to it by raising prices for consumers. This may prove to be a risky move because some of their consumers will not receive it well. Especially not if what the SME supplies are not essential goods.
It is vital to understand that there are two sides to inflation, which means that even consumers will be equally affected. For instance, as of May 2023, the United Kingdom’s inflation rates have remained adamantly high at 8.7%, forcing the Bank of England (BOE) to seek measures. This leads to big price hikes across the economy which will take a punch at the spending abilities of consumers. A stifled purchasing power will make them conscious of the outflow of their money, causing a reluctance in paying a higher price for non-essential goods that the SMEs will supply.
A decreased consumer demand will inevitably mess with an SME’s ability to maintain profitability. As it is they function on tight margins. Strapped for cash to keep their businesses afloat, they turn to banks. However, banks may not be the friendliest during inflation. A scenario from the United States of America will tell you why. The U.S. has experienced a collapse of regional banks, Silicon Valley Bank, Signature Banks, and First Republic. This has led to small business owners being mindful of the ability to access capital and also the safety of banks.
What is worse is that as a result of rising interest rates caused by inflation, the banks are tightening the noose around the necks of SMEs by making it harder for them to get loans. An article published by CNBC on the impact of inflation on small businesses had interviewed Mitchel Seller, an entrepreneur who runs ‘Iowa Computer Gurus’ in Des Moines. Despite having been in business for 17 years, he confesses that: “It is a tightening where banks are asking more questions, and it is becoming harder to get loans. I believe business development is being stifled because of interest rate raises … I have to pay 6.5% interest on a loan that a year ago I would have paid 3%”.
What this particular incident illustrates is that with rising interest rates, it becomes more expensive to borrow capital. This lack of access to credit hampers their ability to invest in growth initiatives. Thus jettisoning the ability of the business owner to expand their business.
Additionally, a few other dead ends that inflation throws SMEs into are workforce challenges (as inflation increases the cost of living, employees seek higher wages to keep up with their expenses), and supply chain disruptions (inflationary pressures bottlenecking supply chains cause delays and shortages of critical materials).
A long and hard look at these struggles frames how SMEs, as opposed to larger corporations, with their lack of negotiating power may find it extremely challenging to secure a safe spot in the economy or keep up with what inflation throws at them. What needs to be realised by SMEs, big businesses and everyone alike is that inflation has never not happened. It has either shown its full prowess and destroyed economies left right and centre. Or it has always been lurking in the shadows waiting to strike.
Therefore SMES must fight back with all their might. To do this, they need to remain competitive, be creative in pricing to address sales slumps, reach out to customers and look for alternative funding methods. While fighting against inflation may look like putting a band-aid on a bullet hole, it is comforting to know that there is some light at the end of the tunnel.
(Sandunlekha Ekanayake)