Inflation affects us all in different ways. Take a deep dive into who is likely to benefit from inflation and how this affects loans and interest rates.
What are the effects of inflation? Inflation occurs when there is a generalized increase in the price of goods and services, leading to a fall in purchasing power. Among the many inflation effects is impact it has on interest rates. What happens to interest rates during inflation? Interest rates are increased by central banks, such as the Federal Reserve, to try to slow the rate of inflation. This translates into a higher profit for the bank as a lender.
Faced with this situation and, above all, if you are one of those who are thinking of applying for financing, it is important to consider the question “how does inflation affect interest rates” and what your financing alternatives are.
In the case of financing for acquiring a new business, it is important to know other options such as revenue-based lending (RBL). Revenue-based lending is a financing model based on the revenue that will not be affected by increases of interest rates. This may be crucial considering the current growth in acquisitions in e-Commerce and Saas businesses.
In the following lines, we will review all these issues: what is the current inflation situation and what are the estimates for 2023, how inflation affects financing, and what are the financing alternatives available so that inflation is not an obstacle in your plans to buy a business.
Let's get started!
The Federal Reserve has not established a formal inflation target, but policymakers generally believe that an acceptable inflation rate is around 2%. The annual inflation rate for the United States is 6% for the 12 months ended February 2023, according to U.S. Labor Department data. As you can see in the table below, the year 2021 is the one with the highest inflation rate from the last 10 years. While inflation rates for 2022 and 2023 have dropped since 2021, inflation rates are still relatively high. To give some perspective on other economic crises, in 2008 after the crash of Lehman Brothers, the inflation rate was 3.84%
And the forecasts are not good, by the looks of it, Americans will have to get used to living with high inflation for the rest of the year.
The forecast by the central bank is that inflation will remain upwards of 5%.
As we introduced at the beginning of this article, inflation is a generalized increase in the price of goods and services, which has a direct impact on the interest rates associated with loans. Therefore, if you are thinking of acquiring a new business, are looking for financing to do so, or plan to do it in the future, it is important that you know how inflation affects lenders and borrowers in traditional models.
How does inflation affect lenders? And how does inflation affect loans? Below, we have summarized the main effects that this 5.4% increase in inflation may have if you have or are thinking of applying for financing from traditional sources. Think about it, maybe other financing alternatives can benefit you and give you the peace of mind you need to focus on your new project. It’s also important to consider who is most likely to benefit from inflation?
The basic definition of inflation is the rate at which prices for goods and services rise and the basic definition of interest rates is the amount charged by the lender to the borrower. These rates are influenced by the Central Banks like the FED in the United States or the ECB in Europe.
Basically, interest rates are a good way for central banks to influence the economy: if the inflation is high, central banks tend to increase the interest rates and this causes inflation to decrease. When inflation is low, the central banks want to stimulate the economy by setting the interest rate low and this increases inflation to normal levels.
Why are lenders hurt by inflation? When central banks set higher interest rates, it is more attractive to save. This means less demand for loans, decreasing economic growth, dropping prices, and higher unemployment.
As we have seen throughout this article, inflation is rising and will probably continue to do so in the coming months, which is something to take into account if you are interested in acquiring a business.
Revenue-based lending is linked to inflation, but not in terms of interest rates. Repayment is based on the revenue of the business. This means that if you opt for this type of financing to acquire a business, the way you repay the amount you have borrowed will depend on the revenue of your business. And, most likely, you have made sure to buy a business that will grow, so the repayment of the amount will be comfortable for you and you will avoid surprises.
Still not convinced it's for you? Let's dig deeper into the benefits of RBL and find out their benefits compared to other sources of financing.
The revenue-based lending model means that the person who accesses this financing will pay back the amount lent with a percentage of their revenues. Why do I tell you all this? Because if you are still reading this article, this information is of interest to you. Normally, you are worried about the increase in inflation and how that affects traditional financing in terms of rising interest rates. However, with revenue-based lending, you don’t have to think about interest rates. So… stop being worried about that!
Revenue-based lending is a flexible and fast type of financing that has nothing to do with other solutions currently on the market: no personal guarantees, no equity kicker.
There are a set of solutions in the market offering this type of financing for new business acquisition and growth. Each of them presents different features in terms of the regions where they operate, type of transaction they finance (working capital, acquisition), target, and lending period.
Throughout this article, we have analyzed the current inflation situation and pointed to what to expect in the coming months. We have also analyzed how this rise affects the interest rates of traditional financing models, detailing how this can affect you.
Revenue-based lending seems a very suitable solution to avoid the impact of interest rates. Through this model, you will repay only according to your income and you can forget about whether the interest rate goes up or down. Don't let external factors influence your acquisition decision and switch to revenue-based lending.