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How Concerned Should Small Business Owners Be About Inflation? — Ben Johnston

According to the MetLife and U.S. Chamber of Commerce Small Business Index for Q2, 88% of small businesses are concerned about the impact of inflation. Considering inflation rose to 9.1.% in June, many entrepreneurs are wondering what they can do to offset the increases. Today on the Atlanta Small Business Show, we’re pleased to welcome small business expert and the COO of Kapitus, Ben Johnston, to share his insight into how businesses can cut spending, shift offerings, and what government funding is available.

Transcription:

Jim Fitzpatrick:
Ben, thanks so much for taking the time out of your schedule there, it looks like you’re in New York City, to come in and join us on the show.

Ben Johnston:
I am. Thank you very much for having me.

Jim Fitzpatrick:
Great. How is inflation impacting small businesses today, from your perspective?

Ben Johnston:
Well, inflation is a problem for small businesses nationwide. When we dig into it, we see inflation impacting businesses in four primary ways. The first is around wage inflation. It’s a hot labor market out there.

Jim Fitzpatrick:
That’s right.

Ben Johnston:
Which has created labor shortages and historically low unemployment rates, making it hard to find and retain talent.

Jim Fitzpatrick:
Right, right.

Ben Johnston:
The second is around the cost of goods inflation, this is driven primarily by rising energy prices and supply chain disruptions. This makes it hard to obtain consistent supplies at reasonable prices.

Jim Fitzpatrick:
Right, right.

Ben Johnston:
Then thinking about the cost of rent and facilities inflation, this is driven by high demand for real estate and now by rising mortgage rates. This really makes it hard to find and keep affordable spaces for small businesses.

Jim Fitzpatrick:
Yeah, no question about it.

Ben Johnston:
Then thinking about cost of capital, obviously the Fed is taking a lot of action these days and that increase in interest rates is making it harder to finance growth for small businesses. These forces are all combining to make a challenging market environment and businesses have to navigate all of those complex issues.

Jim Fitzpatrick:
That’s right. While the small business owners are going through this, so are their customers, so you might see a little bit of a receding of customers coming in the front door or clicking onto your website because they too are feeling the same pinch, right?

Ben Johnston:
Absolutely, and so small businesses are having to adapt and try to meet their customer where they are.

Jim Fitzpatrick:
Sure. In your opinion, what can businesses do to offset inflation?

Ben Johnston:
Yeah, that’s the $64,000 question. We are seeing a lot of creativity from our small business clients in this area right now. When I look at contractors and manufacturers, a lot of them are buying in bulk. They’re doing that in order to lock in the price of materials, they’re doing it to avoid supply chain disruptions, and some are buying now with the expectation that they’ll actually be able to charge more for those items in the future. There’s a little bit of inflation arbitrage going on with creative entrepreneurs.

Jim Fitzpatrick:
Yeah, sure.

Ben Johnston:
We’re also seeing businesses working to control their labor costs. Now, this is a really big issue across the board. It’s an especially big issue for the restaurants that we talk to. We see some restaurants are actually installing QR codes. I’m sure a lot of us have used them recently.

Jim Fitzpatrick:
Yeah, that’s right.

Ben Johnston:
They’re allowing for remote ordering and more self-service options. Restaurants are encouraging customers to come in and pick up instead of ordering delivery. Some are even adjusting their menus to feature cheaper, less labor intensive items to take some of that burden off of their cook staff.
We’re also seeing businesses that have large fuel costs, anybody with a truck fleet, some of them are adding fuel surcharges to their bills just to cover the cost of bringing their good to the home of the customer.

Jim Fitzpatrick:
Yeah, that’s right, that’s right. It was funny, you said the $64,000 question, with inflation it’s probably now a $120,000 question.

Ben Johnston:
Exactly, 128,000, exactly.

Jim Fitzpatrick:
That’s right, that’s right. It is so hard to navigate through this employment situation, because even for those companies that are looking for good people, it’s so hard to find good people and then keep them because they are going to get offered a job, in many cases they’re offered a job within the first month of employment with you. Somebody comes along and says, “Hey, we need you so badly. We’ll give you a signing bonus or we’ll give you $5 an hour more than what you’re currently making.” It’s just absolutely crazy out there on the employment side, right?

Ben Johnston:
Yeah, it really is. I think people have been trying to figure out how they can retain their employees. Obviously, people are having to pay up and give raises, but I think it’s also incredibly important to be open and transparent with your employees. Great small businesses have great employees and really build their business around the retention of great employees who all take ownership in that business in some way, shape or form. I think being open and transparent about the issues facing the business and soliciting their help and advice on how to make things work will offer a more inclusive environment that hopefully will add some intangibles to help retain in talent during that time.

Jim Fitzpatrick:
Yeah, no question about it. These are unique times because, as you pointed out, it’s a tight labor market, unemployment is at an all time low and employers are paying more than they ever have before for labor, which means with the typical American that’s out there that’s making more money and feels good about their employment opportunities, they spend their money. Typically, Americans don’t make more money and save it, they spend it, they live a better lifestyle, which is the good news for small business owners out there, the fact that you’ve got people that are probably coming into your business as well with their new increase in their salaries.

Ben Johnston:
Yeah, I think that’s completely true. In fact, if you think about small business revenue, the vast majority of it is consumer spending. Right now, the consumer is very strong. Unemployment is at historic lows, employees and consumers came out of the pandemic with a lot of stimulus money saved. We saw saving rates at rates we haven’t seen in many, many years, coming out of the pandemic. Now, some of that is starting to erode with higher prices, but in general, the American consumer remains fairly strong. That has translated into a fairly robust small business economy to this point. We, as providers of capital and partners with the small business community, are still bullish on the opportunities for growth for small businesses throughout 2022 and 2023.

Jim Fitzpatrick:
That’s great, that’s great. Is it a good time, in your opinion, to start a small business?

Ben Johnston:
Look, I think anytime is potentially a good time to start a small business. Small businesses are extremely creative and they’re able to find gaps in the economy where their services are needed. I do believe that in times of turbulence that creates even more gaps and more opportunities in the space, and so those with creative ideas and great teams around them are able to go take advantage of those opportunities.

Jim Fitzpatrick:
Sure.

Ben Johnston:
We saw that during the pandemic, when there was an absolute explosion in applications for new business registrations.

Jim Fitzpatrick:
Yeah. Also, there was also an increase for PPP money and idle money from the SBA. Talk to us about some of the funding that’s available to small businesses right now.

Ben Johnston:
Sure. Well, most of the big headline government programs that we got to know well during the pandemic have gone. However, businesses are still eligible for employee retention tax credits, or ERTC, from the IRS. The basic premise of this is that some small businesses will qualify for tax rebates on the wages that they paid during the early days of the pandemic, largely between March 13th and December 31st, 2020. Now, not all businesses are going to qualify for this, but we encourage all businesses to talk to their accountants about this program and to see whether they are eligible for additional credit from the IRS as a result of that.

Jim Fitzpatrick:
Yeah. It always amazes me when you hear the SBA come out or some government agency out there that’s giving out money that goes, “We didn’t even use it all, we’ve got another billion or $2 billion laying around and we haven’t used it. You’re thinking to yourself, “Oh my gosh, if this could get into the hands of small business owners, it would be phenomenal,” but in many cases small business owners just don’t know that they qualify for it, or maybe they don’t know the next step to take, or they think there’s so much red tape they say, “I’ll never get it,” when in reality, in many cases, those agencies are just waiting for those applications to come in so that they can deploy that capital, right?

Ben Johnston:
Absolutely, and to some extent that’s our job, to make sure that our customers know about this and to do what we can to educate the small business community about the opportunities that are available to them.

Jim Fitzpatrick:
Yeah, no question about it. What can businesses expect to see for the remainder of 2022 and as we go into 2023 with regard to inflation? Think it’ll start to come down anywhere now that the Fed has raised the rate?

Ben Johnston:
Yeah. Despite all the headwinds in the economy, as I mentioned before, we continue to be really optimistic about the overall small business economy going forward. I do expect that the Fed action in raising interest rates here is going to slow down the economy overall and ultimately will start to bring down inflation by performing targeted demand destruction. We had very, very, very red hot consumer demand coming out of the pandemic. I expect that with higher energy prices and just inflationary pressures across the board that will start to slow. Our expectation is that small businesses will be able to weather that storm and that the economy will maybe slow, but not stop growing. Overall, we are bullish about the future. We think it’s going to be a little bumpy for the rest of 2022 and into ’23, but we have confidence overall in the business economy.

Jim Fitzpatrick:
Sure. I think you would agree, a little bumpy is way better than the great recession of 2009, right?

Ben Johnston:
Yeah.

Jim Fitzpatrick:
People can deal with a little bumpy, they can’t deal with a complete shutdown or something that is so terrible that it puts small businesses out, right?

Ben Johnston:
Absolutely. We were providing capital back in 2008 and 2009 to small businesses and it was a tough environment.

Jim Fitzpatrick:
Sure.

Ben Johnston:
But we, of course, don’t expect a recession like that, but regardless of what comes, we want to be here for our customers to make sure that they have the liquidity they need to take advantages of the market opportunities out there.

Jim Fitzpatrick:
Sure. For our audience, because I know that they’re going to want to know a little bit more about you and specifically about Kapitus, tell us about what your company does and the solutions it provides.

Ben Johnston:
Sure. At Kapitus, we work closely with small businesses to provide growth capital. We do that through loans, factoring products, and equipment finance products. We operate in all 50 states across a very wide range of industries. We generally provide capital in amounts between $5,000 and $1 million. We want to have a very consultative and consultative process with our customers. We want to work closely with them to identify their needs in capital, identify the uses of it, and then help structure a product that works in terms of the amount that they need, the term of the opportunity, structuring the payback around the opportunity at hand, and then making sure that they know that additional capital will be available to them in the future assuming that the opportunity remains as they grow. We want to partner with them through their life cycle.

Jim Fitzpatrick:
Well, that’s fantastic. There is definitely a place for Kapitus for entrepreneurs and small business owners that are listening to us have this conversation today. You know when you walk into your bank and you say, “I need X number of dollars to grow my business,” you might as well not even walk in. I’ve been doing this for a long time and owned a number of businesses, as many of you know, as an entrepreneur, and it’s probably one of the toughest things to do, is to try to get money from the bank that you give money to. You make your deposits every single day or every single month, and when you go to them, they say, “If you can tell us why you do not need this money, then we’ll consider giving it to you.”
Companies like Kapitus are very important to have in your overall plan because it’s companies like that that understand entrepreneurship, understand a small business and they’re there to help. Ben Johnson, chief operating officer of Kapitus, the people that you need in times of good and times of trouble, or as you call it, bumpy.

Ben Johnston:
bumpy.

Jim Fitzpatrick:
Thank you so much for joining us on the show, very much appreciate it.

Ben Johnston:
Thank you for having me.

Jim Fitzpatrick:
Great.


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