Medium-sized businesses face cost squeeze as unable to raise prices

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Over three quarters of medium-sized businesses are absorbing cost increases as they are unable to raise prices for customers, West Midlands-based Paragon Bank research has found.

Just under a quarter of medium-sized companies with between 50 and 249 employees have increased prices this year despite soaring costs, rising to just under a third for smaller businesses with between 10 and 50 employees. Sole traders are more likely to raise prices, with 39 per cent stating their have done so this year.

Over half of medium-sized firms said they can’t raise prices because they are locked into a contract with a customer, with 13 per cent stating they would like to raise prices but are unable to do so as it would make them uncompetitive.

However, businesses said that if costs continued to rise, they would be forced to increase prices.  Three fifths of all SMEs surveyed claimed they would be likely to increase their prices if inflation rises further.

Among those who have increased prices over the last six months, decision makers have on average increased prices by 9.8%. However, it is sole traders that have increased prices more than their larger business peers, increasing the amount they charge by 10.9%, compared to 8.6% for medium-sized companies.

SMEs said they had experienced their greatest cost hikes in energy, with the average energy bill increasing by 16.3% compared with six months ago. Company car costs were the second highest increase at 15.1%, with raw material costs up 14.3%. Asset costs were up by 14.1% on average.

John Phillipou, Paragon Bank Managing Director of SME Lending, said: “Businesses have faced intense cost increases in the past six months and that looks set to grow in the face of further rising energy prices. Many companies are having to absorb these cost increases as they face difficulties in renegotiating contracts, particularly medium-sized firms that are key suppliers to larger businesses, or they fear losing business if they raise prices.

“Businesses have told us they are taking a number of actions to mitigate the impact, such as shelving planned recruitment or cutting back on research and development investment. Companies should also ensure they are engaging with their bank and examining ways they can make their business as efficient as possible, including looking at whether they could extend the term length of asset finance agreements.”