MAPping the Future

Inflation is an ever-looming threat to the survival of many small and medium enterprises (SMEs). It hurts business owners’ bottom lines in every possible way: it reduces consumer spending, especially on non-essential items; increases the cost of labor and raw materials; and places higher interest rates on borrowing.

But while most SMEs are facing an uphill battle for growth in the next few months, it’s not all bad news. Businesses dealing in essential goods and services have a strong chance of thriving, as well as brands with loyal customer bases who are unlikely to switch despite a price increase.

As for SMEs that do not belong to the above, is there a way to make money during an inflation? If you implement well-calculated changes and plan for the long run, yes. Here are five ways businesses can take advantage:

1. By raising your prices

The risk of losing customers from a price hike is now much lower, especially if businesses across your industry have done it much earlier. At this point, it won’t just protect your profit margins — it will help you pass on the higher cost of production and labor to customers.

This advice particularly goes to products and services that are one of these things: critical, low-cost, difficult to obtain, or have a strong following.

2. By obtaining financing now over later

The government fully expects inflation to stick around, given its inflation forecast of 4.5-5.5 percent for the rest of 2022 and 2.5-4.5 percent for 2023. This means the money you have is at its most valuable now; it will decrease in value the longer you let it sit. So if you already have business purchases, investments, and expansions in mind, now is the time to fund them — especially if you’re already anticipating higher costs for them in the future.

To afford the cost upfront, you may have to borrow. This is easier said than done as SME financing from banks just got more expensive. Due to the interest rate hikes recently enacted by the Bangko Sentral ng Pilipinas (BSP), banks are paying more to borrow money from the BSP, and the increase in costs are passed down to borrowers.

For this reason, legitimate non-banking providers such as First Circle are the more favorable financing partners, since their funding is not sourced from the BSP. In the case of First Circle, the funding they provide to SMEs was secured from their investors before the interest rate hikes. In July. First Circle Chief Executive Officer Patrick Lynch even announced that they are maintaining their interest rate of as low as 1.39% until the end of 2022. While other private lenders have not made similar announcements, initiatives like First Circle’s should be used by SMEs to negotiate favorable loan pricing even in the midst of inflation.

For business owners with no immediate need, it is still in your best interest to “insure” your business from further inflationary shocks. Consider a revolving credit line, which First Circle offers with zero-cost availment: it provides you a pool of funds to dip into whenever a business need arises. You’ll only have to pay for the amount you used plus interest on that amount, making it a low-commitment way of securing your business.

3. By striking personalized deals to increase retention

Clients in the B2B space are much harder to obtain, and they vary in market position, loyalty, and dependence on your products and services. So instead of applying a blanket price increase on your entire B2B portfolio, take the time to apply surgical pricing on each contract. This will reduce their risk of switching to another provider.

High-value customers and loyal clients can be locked in with a limited-time grandfather clause on their pricing. Price-sensitive clients can get special trade-ins like free shipping if they meet a certain order amount. Meeting the clients you want to retain in the middle will also give you more opportunities to increase margins and sales volume.

4. By diversifying your suppliers

Loyalty to a single supplier is only an advantage if they’re the only one giving you your preferred pricing. Even then, you’ll be at their mercy if they decide to increase prices, or if they experience supply chain shortages. To secure your business, build a diverse supply chain composed of multiple resilient suppliers. Aside from having flexibility during shortages, you’ll also be in a better position to negotiate if suppliers increase prices, since you can pit their offers against each other.

SMEs always have the option to stay lean and mean until inflation subsides, especially if they are not in a position to take risks. However, trying to make do on ever-narrowing profit margins may only be delaying the inevitable. Thus, it’s best to start managing the impact of inflation, and commit to growth through good planning and increasing business efficiency whenever possible.

A revolving credit line is the best financing tool for putting these methods to work. Due to the financial security they provide, you get more leeway in negotiating deals from suppliers and clients. Your credit line can also bail you out of unexpected cash flow gaps that can hinder your progress. More importantly, it can help you fund growth plans before inflationary pressures increase prices and reduce your money’s value — giving your business a fighting chance at making a profit during inflation.

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is Member of the MAP. He is the Vice President for External Relations of First Circle, a fintech provider that helps SMEs grow through long-term partnership, flexible financing, and free tools to help them find government opportunities. This article is co-written with Jess Jacutan, First Circle’s Content Marketing Lead. Feedback at <map@map.org.ph> and < benedict@firstcircle.ph>).