Inflation and your borrowing: why the same project now needs a bigger loan

Inflation rarely turns up in a loan application as a line item. It turns up in the quote that’s 12 per cent higher than last year’s, the supplier who emails new pricing, the power bill that jumps and the customer who suddenly queries your invoice. By the time you ask a lender for money, inflation has already changed how much you need and how the lender will look at you.

This guide follows the effect through from the headline numbers to the loan amount, with one worked example and a checklist you can use when sizing your next facility.

What do the latest inflation numbers say?

The Australian Bureau of Statistics reported annual CPI of 4.0 per cent for the 12 months to August 2026, up from 3.5 per cent in July. Trimmed mean, the measure that strips out the most extreme movements, was 3.6 per cent, unchanged. The September figure is due on 28 October 2026.

The ABS commentary is worth reading because it shows where costs are actually moving, and several of the pieces are business costs:

• Electricity rose 13.2 per cent over the year, mainly because Commonwealth electricity rebates ended.
• Automotive fuel rose 13.5 per cent, and vehicle maintenance and repairs rose 6.2 per cent.
• New dwelling prices rose 5.4 per cent as builders passed on higher labour and materials costs.
• Meals out and takeaway rose 4.1 per cent.
• Rents rose 3.6 per cent.

Those are consumer measures, not a business cost index, but they point to the same pressure points: energy, transport, construction and wages. If you run a cafe, a trades business, a transport company or a retail shop, you’ve probably felt two or three of them directly.

Why does inflation increase how much you need to borrow?

Because the business runs on a cycle: pay suppliers and staff, deliver, invoice, wait, get paid. Inflation makes every stage of that cycle more expensive before the money comes back.

Consider the pieces:

• Stock and materials cost more per unit, so the same volume ties up more cash.
• Wages rise through award increases and competition for staff.
• Energy and fuel feed through to operating costs.
• Debtors are larger in dollar terms, and you wait for them just as long.

The effect is that the working-capital requirement grows even if sales volume doesn’t. Our guide to working capital explains the cycle, and inventory management and cash flow shows where it bites.

A worked example

A homewares retailer buys seasonal stock for $180k ahead of Christmas and sells through over about 14 weeks. A year later, the same range from the same suppliers costs 6 per cent more: $190,800. Wages for casual staff over the season rise by $4k, and the power bill adds $2k.

Nothing about the business has changed, yet its seasonal funding need rose by about $16,800, roughly 9 per cent. If the owner borrows the same amount as last year ($180k), the shortfall comes out of the overdraft or, worse, supplier credit. Re-sizing the facility using current quotes would have avoided it. That is a simple illustration, not a forecast, but the lesson holds: take last year’s loan size as a starting point, never as the answer.

Does inflation make lenders more or less cautious?

Both, depending on the lender and your numbers.

• Margins matter more. Rising sales can disguise falling profit. Lenders compare gross and net margins period to period, so if your costs are climbing faster than your prices, the trend shows.
• Serviceability is tested at a buffer. If higher interest rates accompany inflation, the repayment a lender is willing to assess you at goes up. See what lenders mean by serviceability.
• Valuations can rise. Where inflation lifts property or equipment values, security improves. Where it hits a sector hard, lenders become more conservative about it. Our guide on how lenders value commercial property shows how they decide.
• Policy shifts. Lenders re-price and re-weight sectors regularly. A business in an exposed industry may find a lender less enthusiastic than it was last year.

None of this means a loan is out of reach. It means the application needs to show that the business knows its costs and has already dealt with them.

Who gains and who loses from inflation when they owe money?

A fixed repayment is worth less in real terms as prices and wages rise. That sounds like good news for borrowers, and sometimes it is. It only works if your revenue rises with costs.

Situation	Effect of inflation
Fixed repayments, prices raised in line with costs	Repayment becomes a smaller share of revenue; helpful
Fixed repayments, prices held while costs rise	Margin squeezed; the repayment stays the same but profit falls
Variable debt	Repayments may also rise if rates follow inflation
Customers on long fixed-price contracts	Costs rise and you can’t pass them on; the worst combination
Debtors paying slowly	Real value of what you’re owed falls while you wait

If you have long-term fixed-price contracts, check whether they include escalation or review clauses. If they don’t, factor the exposure into any borrowing decision.

How to size a loan when prices keep moving

A tidy approach, in order:

1. Re-quote everything. Use quotes from the last 30 days, not last season’s invoices.
2. Add a contingency. For a project that will run for months, allow for further increases between the quote and the final bill. Many owners allow a modest margin and keep it visible rather than burying it.
3. Rebuild the working-capital cycle. Update stock, wages, energy and debtor days. Our cash flow gap calculator helps with the mismatch.
4. Re-check margins. Use the margin and markup calculator to see what price you need to hold your profit.
5. Match the product to the need. A short-term cost spike suits a short-term facility; a lasting change in your cost base might need a different structure. Our guide to choosing finance for your business purpose sets this out.
6. Plan the exit. Don’t borrow against a cost you hope will pass without knowing how you’ll repay it. See exit strategies for short-term loans.

If you want a second pair of eyes on the amount, send us the details and we’ll talk it through.

Pricing is your first line of defence

Borrowing covers the gap while prices catch up. It shouldn’t be the way you absorb costs permanently. If your costs have risen and your prices haven’t, you’re funding your customers’ savings out of your own pocket.

Practical steps:

• Review prices at least twice a year, and sooner for items with volatile input costs.
• Tie increases to specific cost drivers you can explain, such as freight, energy or materials.
• Use surcharges or fuel levies where your industry accepts them, and review them as costs fall back.
• Shorten payment terms where you can, because slow payment during inflation is an unsecured loan to your customer. See how to get customers to pay faster.
• Consider invoice finance if growth in debtors is the pressure point.

Our guide on raising prices without losing customers goes through the approach in detail.

Where does a bank fit, and when do you look further?

Banks are often the cheapest source of business finance, and they’re a sensible first stop, particularly for an established business with solid financials. If the bank’s policy fits your situation, take its offer seriously.

If the bank has said no, is slow, or has offered less than the cost increase demands, that’s common when costs are shifting quickly. It doesn’t say your business is unsound. There are other lenders who assess on different grounds, such as property equity, receivables or stock, and a conversation is the quickest way to find out which could suit you. See why your bank said no and why it’s not personal.

Ready to size the loan properly?

If rising costs mean this year’s project, stock order or payroll gap is bigger than last year’s, it’s worth working out the right amount before you apply. Our enquiry takes about a minute, and no one checks your credit file when you ask. We don’t pass your details to a stack of lenders; a real person reads your situation and phones you to talk it through.

Fill it in as accurately as you can, especially the amount, the purpose and the timing, so the first option we suggest is one that actually fits.

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