Commodity prices have risen exponentially, causing inflation that is highly detrimental to small and medium-sized businesses by increasing both their fixed and variable costs.
Given this reality, it makes sense to turn to new forms of business financing. When the economic situation becomes challenging, alternative financing solutions can offer better results than traditional ones.
1. How Raw Material Prices Affect a Company’s Accounting
The rising cost of raw materials, including energy sources, is one of the major concerns for business owners this year.
The 2022 Business Climate Study by the Spanish Chamber of Commerce revealed two indisputable facts:
– 8 out of 10 Spanish companies consider rising raw material prices to be the main obstacle to their growth.
– 42.6% of the companies surveyed complained about raw material shortages and supply problems.
Consequently, high raw material prices are causing supply problems and creating significant uncertainty for business owners. The industrial sector is the hardest hit, although the impact is felt across all types of businesses.
These consequences of inflation also extend to small and medium-sized enterprises (SMEs) and the self-employed, since all professional activities consume energy, including services. The service sector always relies on physical inputs, such as food in restaurants, water, shampoo in hair salons, fuel in taxis, etc.
The retail price depends on production costs and the profit margin applied. Among the consequences of inflation is a loss of purchasing power. However, when raw material prices rise, it is impossible to reduce this cost.
The operating margin shrinks, and demand for products and/or services drops dramatically as consumers’ purchasing power declines. In this context, business financing becomes an essential ally.
2. Reduced Availability of Raw Materials
Let’s consider another negative consequence of inflation:
Shortages of goods and supply issues
Inflation not only drives up prices but also reduces the availability of products, which in turn increases their cost.
To address this additional challenge, businesses often need to plan purchases in advance or increase purchase volumes to maintain their margins. However, all of this requires access to competitive and appropriate business financing.
3. Financing Tips and Recommendations When Production Costs Rise
We want to provide you with useful information to help you overcome these temporary challenges related to inflation in the supply chain.
Below, we offer four particularly valuable financing suggestions for businesses:
– Avoid relying on a single financial institution, especially if it’s a bank. We recommend exploring different options to find the best possible terms.
– Leverage your assets to secure the business financing you need. In this regard, discounting promissory notes and factoring allow you to convert your credit sales into cash sales. This way, you can purchase all the raw materials you need at the right time, without having to wait for trade credits to mature.
– Similarly,trade credit and the assignment of payments to suppliers give you time to generate returns on those payments. Thanks to these financing options, your suppliers get paid sooner without you having to make the payment, since the financier advances the payment to them in exchange for a fee, giving you the opportunity to use that money to procure new materials and/or energy for future orders.
– Find financing to become a producer of these essential resources. For example, if you invest in energy self-consumption, you’ll achieve significant savings in the medium term. You just need to find an attractive and profitable financing source to pursue this strategy. In most cases, alternative financing offers the best terms.
Rising raw material prices are a setback, but if you manage them well, they can become an opportunity.
Remember that this situation also affects your competitors, so if you secure the right business financing, you’ll come out stronger.
Want expert advice?
Contact us at WorkCapital, and we’ll help you chart your course.
