The Impact of Tariffs on Small Business Lending
- Executive Summary:
This report analyzes the multifaceted impact of tariffs on small business lending. Tariffs, defined as taxes on imported goods, can significantly affect small businesses through various mechanisms, primarily by increasing their operational costs and creating economic uncertainty. These impacts can erode profitability and financial stability, leading lenders to perceive small businesses as riskier borrowers. Consequently, this can result in tighter credit conditions and reduced access to capital, hindering the growth and sustainability of small businesses. The report delves into the definition and purpose of tariffs, their direct and indirect effects on small businesses, the subsequent implications for lending practices, and potential mitigation strategies and government support mechanisms. Ultimately, understanding these dynamics is crucial for financial institutions, policymakers, and small business owners navigating an evolving global trade landscape.
- Defining Tariffs and Their Mechanisms:
2.1. Definition of a Tariff:
A tariff is fundamentally a tax or duty imposed by a government on goods imported from foreign countries . This levy is typically charged by the customs authority of the importing nation as the goods cross the border . It is important to distinguish tariffs from other forms of taxation, such as sales, income, or property taxes, as tariffs specifically target the cost of products originating from abroad, directly influencing international trade dynamics . This direct link to imported goods means that businesses engaged in international supply chains or those competing with foreign products are particularly susceptible to the effects of tariffs.
2.2. Purposes of Tariffs:
2.2.1. Protecting Domestic Industries:
A primary objective of tariffs is to safeguard domestic industries from foreign competition . By increasing the price of imported goods, tariffs make domestically produced alternatives more attractive to consumers . Historically, tariffs have been used to nurture nascent industries, allowing them to grow and become competitive without the immediate pressure of established foreign producers . This protectionist intent aims to shift consumer spending towards local businesses, thereby bolstering their market share and potentially fostering job creation within the domestic economy.
2.2.2. Generating Government Revenue:
Historically, tariffs served as a significant source of income for governments . In the early days of many nations, tariffs were often the primary means of funding government operations . However, in most developed countries today, other forms of taxation, such as income and sales taxes, constitute the bulk of government revenue . While tariffs still generate some revenue, their application in modern economies is often driven more by strategic trade policy objectives than by the need for government funding .
2.2.3. Trade Policy and Negotiation Leverage:
Tariffs can be strategically employed as a tool in international trade negotiations and as a means to address perceived unfair trade practices, such as dumping (selling goods below cost in a foreign market) or the provision of illegal subsidies . The threat of imposing tariffs or their actual implementation can serve as leverage to encourage other countries to modify their trade policies or to open their markets to domestic goods and services . Furthermore, countries may impose retaliatory tariffs in response to trade actions taken by other nations, potentially escalating into trade disputes .
2.2.4. National Security:
In certain strategic sectors, tariffs may be implemented to protect industries deemed vital for national security . The rationale behind such tariffs is to reduce a nation’s reliance on foreign suppliers for essential goods, ensuring domestic production capacity in times of crisis or geopolitical instability . This prioritization of national security over pure economic efficiency reflects a recognition that certain industries are too critical to be subject to the vagaries of international trade and potential disruptions.
2.3. Mechanisms of Tariff Application:
2.3.1. Types of Tariffs:
Tariffs can take several forms, each with its own method of calculation and potential impact. Ad valorem tariffs are the most common type, levied as a fixed percentage of the imported good’s value . For example, a 10% ad valorem tariff on a $100 imported item would result in a $10 tariff. Specific tariffs, on the other hand, are charged as a fixed amount for each unit of the imported good, such as $2 per shirt or $300 per computer . Lastly, tariff-rate quotas apply different tariff rates depending on the quantity of goods imported; a lower tariff rate applies up to a certain quota, and a higher rate applies to imports exceeding that threshold . The choice of tariff type can influence the price elasticity of demand for imported goods and the overall cost burden on businesses and consumers.
2.3.2. The Harmonized Tariff Schedule:
The application of tariffs is often governed by standardized classification systems, such as the Harmonized Tariff Schedule of the United States (HTSUS) . This compendium categorizes goods and specifies the applicable tariff rates for each category . Importers are typically responsible for correctly classifying their merchandise according to this schedule and declaring its value or quantity . The use of such standardized systems promotes uniformity and predictability in the assessment of tariffs across a wide range of internationally traded goods.
2.3.3. The Role of Customs Authorities:
Customs authorities in the importing country are responsible for collecting tariffs on goods entering the domestic market . When imported goods arrive at a port of entry, they are subject to inspection and tariff assessment . In some countries, importers themselves play a role in classifying their goods and declaring their value, a process known as self-classification . The efficient operation of customs authorities is crucial for the smooth flow of trade and the effective implementation of tariff policies.
- The Direct Impact of Tariffs on Small Business Costs:
3.1. Increased Cost of Imported Goods and Raw Materials:
Tariffs directly function as taxes on imported goods, thereby increasing the cost for domestic businesses that rely on these imports . For small businesses that use imported components or raw materials in their production processes, tariffs translate to higher input costs . Similarly, small businesses that resell imported finished goods face higher costs of goods sold . Industries such as manufacturing, construction, technology, and even service sectors like pool installations, which may rely on imported materials, are particularly vulnerable to these cost increases . For instance, a small manufacturer that imports steel or electronic components will directly experience a rise in their production expenses due to tariffs on these items .
3.2. Impact on Supply Chains:
The imposition of tariffs can significantly disrupt established global supply chains . By increasing the cost of imported goods, tariffs can make certain links in the supply chain economically unviable, forcing businesses to seek alternative sources or reconfigure their operations . Furthermore, the introduction of new tariffs often leads to increased customs procedures, including more stringent paperwork and inspections, which can cause delays in the movement of goods . Small businesses may find it particularly challenging to adapt to these disruptions due to their limited resources and negotiating power compared to larger corporations . Finding new suppliers or shifting production locations can be a time-consuming and costly endeavor, further exacerbating the impact of tariffs on their supply chain efficiency .
3.3. Inventory Management Challenges:
The uncertainty surrounding tariff policies introduces significant challenges for small business inventory management . Fluctuations in tariff rates or the threat of new tariffs can make it difficult for businesses to forecast costs and plan their inventory levels effectively . To mitigate potential supply disruptions or price spikes, some businesses may resort to holding larger safety stocks of imported goods . However, this strategy comes with increased warehousing and inventory carrying costs, including storage fees, insurance, and the risk of obsolescence . The need to maintain larger inventories can tie up valuable working capital, which could otherwise be used for other critical business operations or investments.
- Erosion of Profitability and Financial Stability:
4.1. Reduced Profit Margins:
Small businesses often operate with relatively thin profit margins, making them particularly vulnerable to cost increases . When tariffs raise the cost of imported goods or raw materials, these businesses may have to absorb a portion of these additional expenses, leading to a direct reduction in their profit margins . Unlike larger corporations that may have greater economies of scale or negotiating leverage, small businesses often lack the ability to fully pass these increased costs onto their customers without risking a significant loss of sales volume . This inability to fully offset tariff-related expenses can significantly squeeze their profitability and threaten their financial sustainability.
4.2. Cash Flow Issues:
Higher prices for imported goods, coupled with potential declines in customer demand due to these price increases, can severely strain the cash flow of small businesses . The immediate requirement to pay tariffs upon the import of goods puts additional pressure on their working capital . For small businesses with limited access to financing, this upfront cost can create significant liquidity challenges, potentially hindering their ability to meet other operational expenses or invest in growth opportunities . Moreover, if tariffs lead to delays in receiving imported goods, it can further disrupt their operations and delay their ability to generate revenue, exacerbating cash flow problems .
4.3. Difficulty in Growth and Investment:
With reduced profit margins and constrained cash flow, small businesses may find it increasingly difficult to invest in future growth and expansion . The capital needed for upgrading equipment, developing new products or services, hiring additional staff, or entering new markets may become scarce as more resources are diverted to covering increased tariff-related costs . Furthermore, the uncertainty surrounding the duration and potential changes in tariff policies can make long-term investments seem riskier, causing business owners to postpone or abandon expansion plans . This can have a detrimental effect on the overall dynamism and growth potential of the small business sector.
4.4. Reduced Competitive Edge:
Small businesses that rely on imported goods may face a significant disadvantage compared to larger corporations or foreign competitors when tariffs are imposed . Larger companies often possess greater financial resources to absorb tariff-related cost increases or have more leverage to negotiate better terms with suppliers . This allows them to potentially maintain lower prices than small businesses that are forced to pass on the tariff costs to consumers . Similarly, foreign competitors operating in countries not subject to the same tariffs may be able to offer more competitive pricing, further eroding the market share and profitability of affected small businesses .
- Increased Risk and Lender Hesitancy:
5.1. Perception of Increased Financial Risk:
Lenders assess the creditworthiness of borrowers based on their ability to repay loans, which is directly linked to their financial health and stability . The various negative impacts of tariffs on small businesses, such as reduced profitability, cash flow problems, and increased operational costs, lead lenders to perceive these businesses as posing a higher financial risk . This is particularly true for small businesses operating in sectors heavily reliant on imported goods or those facing increased competition due to tariffs . The heightened risk perception makes lenders more cautious about extending credit to these businesses, as the likelihood of default may be seen as increasing.
5.2. Tighter Lending Standards:
In response to an environment where the financial health of small businesses is potentially weakened by tariffs, financial institutions may tighten their lending standards . This can manifest in several ways, including demands for higher credit scores from business owners, requirements for more substantial collateral to secure loans, and more stringent scrutiny of financial documentation and projections . Lenders may also lower the loan-to-value ratios they are willing to offer or shorten the repayment terms for loans to small businesses in tariff-affected sectors. This tightening of credit standards aims to mitigate the increased risk that lenders perceive in the small business lending landscape during periods of tariff implementation.
5.3. Reduced Loan Approval Rates:
The combination of lenders’ increased perception of financial risk associated with small businesses and their subsequent tightening of lending standards is likely to result in lower loan approval rates for these enterprises . Small businesses that might have been considered creditworthy in a more stable economic environment may now find their loan applications rejected due to concerns about their ability to navigate the financial challenges posed by tariffs . This reduction in access to credit can severely hinder the ability of small businesses to manage their increased costs, invest in necessary equipment or working capital, or even sustain their day-to-day operations, potentially leading to business closures and economic contraction.
5.4. Potential for Higher Interest Rates and Less Favorable Terms:
Even when loan applications from small businesses in tariff-affected sectors are approved, lenders may seek to compensate for the increased risk by charging higher interest rates or offering less favorable loan terms . Higher interest rates increase the cost of borrowing for small businesses, further straining their already pressured finances . Less favorable terms, such as shorter repayment periods or stricter covenants, can also add to the financial burden and reduce the flexibility of small businesses in managing their debt obligations. This increase in the cost of capital can make it more challenging for small businesses to remain competitive and profitable in the face of tariff-induced economic headwinds.
- The Ripple Effect on Consumer Demand and Revenue:
6.1. Higher Consumer Prices:
A significant consequence of tariffs is the potential for higher prices for consumers . When businesses, including small enterprises, face increased costs for imported goods due to tariffs, they often pass on at least a portion of these additional expenses to their customers in the form of higher prices . This can affect a wide range of goods, from everyday necessities like food and clothing to larger purchases such as electronics and automobiles . The extent to which businesses can pass on these costs depends on factors such as the price elasticity of demand for their products and the level of competition in the market.
6.2. Decreased Consumer Demand:
The rise in consumer prices resulting from tariffs can lead to a decrease in consumer demand for certain goods and services . Consumers may become more price-sensitive and opt for cheaper alternatives, reduce their overall spending, or postpone discretionary purchases when faced with higher prices . This is particularly true for non-essential goods or products where consumers have a wider range of choices, including domestically produced options or imports from countries not subject to tariffs . The PYMNTS survey indicated that a significant percentage of informed consumers are worried about how tariffs will personally impact them, signaling a potential reduction in their future spending .
6.3. Impact on Small Business Revenues:
A decline in consumer demand directly translates to lower sales volumes and reduced revenues for small businesses . If customers are less willing or able to purchase goods at tariff-inflated prices, small businesses will experience a decrease in their top-line revenue . This reduction in revenue can make it more challenging for small businesses to cover their operating expenses, service their existing debt obligations, and ultimately repay any outstanding loans . The potential for decreased revenues further contributes to the perception of increased risk among lenders when evaluating loan applications from small businesses.
6.4. Potential for Discontinued Products:
In some cases, tariffs can make the cost of importing certain goods so high that it becomes economically unviable for small businesses to continue offering them . This can lead to the discontinuation of product lines that rely heavily on tariffed imports . While this might prompt some businesses to seek domestic alternatives, such options may not always be available, or they might not meet the quality or price expectations of consumers. The reduction in product variety can negatively impact small businesses that cater to niche markets or rely on a diverse range of imported goods to attract customers.
- Tariffs, Economic Uncertainty, and Lending Standards:
7.1. Tariffs as a Source of Economic Uncertainty:
The imposition of tariffs and the subsequent potential for retaliatory trade measures from other countries inject a significant degree of uncertainty into the economic landscape . The unpredictability of tariff policies, with swift and unexpected increases being possible, makes it difficult for businesses, especially small ones, to plan ahead with confidence . Ongoing diplomatic discussions and the potential for further shifts in trade relations contribute to this volatile environment, making long-term investments riskier and strategic decision-making more challenging .
7.2. Impact of Uncertainty on Financial Institutions:
Broader economic uncertainty, stemming in part from tariff policies, can lead financial institutions to adopt a more cautious approach to lending . During times of economic instability, lenders tend to become more risk-averse and may tighten their overall lending standards across various sectors, including small business lending . This is because increased uncertainty makes it harder to predict future economic conditions and the financial performance of borrowers, leading lenders to prioritize lower-risk investments and borrowers with a strong and stable financial history . The 2025 Certainty Project found that a significant majority of CFOs expect tariffs to exacerbate economic uncertainty and planning challenges for their businesses .
7.3. Planning Challenges for Small Businesses:
The inherent unpredictability of tariff policies creates substantial planning challenges for small businesses . Without clear guidance on future tariff rates or trade regulations, it becomes exceedingly difficult for these businesses to create accurate budgets, develop reliable sales forecasts, and make informed strategic decisions regarding investments, hiring, and expansion . This lack of predictability can lead to hesitation in making necessary business decisions, potentially hindering their ability to adapt to changing market conditions or capitalize on new opportunities. The inability to effectively plan can further undermine their financial stability and increase their perceived risk in the eyes of lenders.
- Government Support and Mitigation Strategies:
8.1. Existing Government Programs for Small Business Lending:
While general government programs exist to support small business lending, specific initiatives directly addressing the challenges posed by tariffs may be less prevalent . The U.S. Small Business Administration (SBA) offers various loan programs, such as 7(a) loans, 504 loans, and microloans, which aim to increase access to capital for small businesses by partnering with lenders and reducing their risk . These programs can be used for purposes like working capital, purchasing fixed assets, or refinancing debt, and could potentially provide some relief to businesses facing tariff-related cost increases . Other agencies, like the USDA Rural Development, offer business programs focused on rural areas, providing loans, loan guarantees, and grants . The Treasury Department also manages programs like the Small Business Lending Fund . Additionally, some states, such as California, have their own loan guarantee programs designed to assist small businesses facing capital access barriers . However, these programs may not have specific provisions or additional support mechanisms in place to directly address the unique challenges arising from tariff implementation .
8.2. Potential Government Initiatives:
To better support small businesses navigating the complexities of tariffs, governments could consider implementing targeted programs or modifying existing ones . This could include the creation of specific loan programs offering favorable terms to businesses demonstrably affected by tariffs, or the provision of temporary tariff relief measures, such as exemptions or subsidies, for small businesses in heavily impacted sectors . Additionally, enhancing export assistance programs could help small businesses that face retaliatory tariffs in foreign markets to find new international opportunities . Streamlining customs procedures and providing clearer guidance on tariff classifications could also alleviate some of the operational burdens on small importers .
8.3. Mitigation Strategies for Small Businesses:
Small businesses can adopt several proactive strategies to mitigate the negative impacts of tariffs on their costs and financial stability . Diversifying their supply chains by sourcing materials and products from multiple suppliers in different countries, particularly those not subject to tariffs, can reduce their reliance on tariffed goods . Exploring opportunities to increase domestic sourcing can also help avoid tariffs altogether, although this may require careful evaluation of cost and quality . Engaging in discussions with existing suppliers to negotiate better terms, discounts, or alternative supply options is another potential avenue for cost reduction . While not always ideal, strategically and transparently passing some of the increased costs onto customers through gradual price adjustments may be necessary to protect profit margins . Improving internal operational efficiency, streamlining processes, and reducing waste can help cut costs in other areas of the business . Finally, maintaining open communication with customers about pricing changes and emphasizing product value can help preserve customer loyalty .
- Illustrative Case Studies and Economic Reports:
9.1. Historical Examples:
The Smoot-Hawley Tariff Act of 1930 serves as a significant historical example of the widespread implementation of tariffs and its subsequent economic consequences . This act raised U.S. tariffs to historically high levels, leading to retaliatory tariffs from other countries and a significant contraction in international trade, exacerbating the Great Depression . While not specifically focused on small business lending, this historical episode underscores the potential for broad tariff policies to negatively impact economic activity across the board, which would undoubtedly have affected small businesses’ financial stability and their ability to access credit.
9.2. Recent Tariff Impacts:
Recent economic reports and surveys provide insights into the more contemporary effects of tariffs on small businesses. A PYMNTS Intelligence report from 2025 highlighted a deepening cash flow crisis for SMBs in the U.S., partly attributed to tariffs and a pullback in consumer spending . The report found that a significant portion of SMBs rely on limited cash reserves and lack access to financing, making them particularly vulnerable to economic shocks like tariffs . Notably, SMBs without access to financing were significantly less confident in their ability to adapt to a changing economic environment and offset tariff-related costs . Another report indicated that increased tariffs on steel and aluminum have led to higher material costs and supply chain disruptions for small manufacturers . Furthermore, a study on the 2018 U.S. tariffs on washing machines showed that while domestic production increased, consumer prices rose significantly, indicating a potential drag on consumer demand that could affect small retailers .
9.3. Potential Future Impacts:
Economic models project that broad tariffs can have significant macroeconomic effects. One analysis suggests that widespread tariffs could lead to a notable increase in consumer prices and a contraction in U.S. real GDP, especially if targeted countries retaliate with their own tariffs . Such a scenario would likely further strain the financial health of small businesses and increase the risk associated with lending to them. The uncertainty surrounding the scope and duration of future tariff policies also poses a continued challenge for small businesses in their planning and investment decisions .
- Conclusion and Recommendations:
The analysis clearly indicates that tariffs can have a substantial and multifaceted impact on small business lending. By increasing costs, eroding profitability, and contributing to economic uncertainty, tariffs make small businesses riskier borrowers in the eyes of lenders. This can lead to tighter lending standards, reduced loan approval rates, and potentially higher borrowing costs, ultimately hindering the growth and sustainability of the small business sector. The ripple effects of tariffs, including higher consumer prices and decreased demand, further compound these challenges by impacting small business revenues and their ability to repay loans.
To navigate this complex landscape, the following recommendations are offered:
For Small Businesses: Proactively implement mitigation strategies such as diversifying supply chains, exploring domestic sourcing options, and engaging in robust financial planning and cash flow management. Building strong relationships with customers through transparent communication and value-added services can also help weather periods of price volatility.
For Lenders: Develop a nuanced understanding of the specific challenges faced by small businesses in tariff-affected sectors. Consider flexible lending approaches and provide tailored financial solutions to help these businesses manage increased costs and potential cash flow disruptions.
For Policymakers: Carefully evaluate the broader economic consequences of tariff policies, particularly their impact on small businesses. Consider targeted support programs, such as tariff relief measures or specialized loan programs, to help mitigate the negative effects and ensure continued access to capital for this vital segment of the economy.
Monitoring the evolving tariff landscape and its impact on the small business sector will be crucial for all stakeholders to adapt and ensure the continued health and vibrancy of the small business ecosystem.
Key Valuable Table:
Table 1: Potential Impacts of Tariffs on Small Business Lending – A Summary
Impact Area Mechanism Consequence for Small Business Lending
Costs Tariffs increase the price of imported goods and raw materials. Higher operational expenses for businesses relying on imports, leading to increased borrowing needs.
Profitability Increased costs may not be fully passed to consumers, reducing profit margins. Lower profitability makes businesses appear riskier to lenders, potentially leading to loan application rejections.
Financial Stability Reduced profit margins and potential decrease in demand can strain cash flow. Cash flow problems increase the likelihood of loan default, making lenders more hesitant.
Lender Perception Increased costs and reduced profitability lead to a perception of higher financial risk for small businesses. Lenders may tighten lending standards, demand more collateral, or charge higher interest rates.
Consumer Demand Higher prices due to tariffs can decrease consumer demand for certain goods. Reduced revenue makes it harder for small businesses to repay existing loans and secure new ones.
Economic Uncertainty Tariffs create uncertainty in the economy and supply chains. Lenders become more risk-averse, potentially reducing overall lending to small businesses.