Almost a year ago, small businesses were contemplating the impact of “Liberation Day” tariffs imposed on nearly all of our trading partners. Over the course of the year, small businesses learned how to navigate these tariffs, altering supply chains and onshoring as much production as possible in an effort to avoid the tariffs' most painful effects.
In February the Supreme Court ruled that the Federal Government had illegally collected tariffs from importers in the United States using the International Emergency Economic Powers Act (IEEPA). As a result of this ruling, U.S. Customs and Boarder Protection (CBP) launched the CAPE (Consolidated Administration and Processing of Entries) portal to handle the processing of refund applications from those parties that paid the tariffs originally and recent filings show that the Trump administration has refunded $100 billion in tariffs struck down by Supreme Court.
Recourse for Small Businesses
While many small businesses and consumers paid higher prices as a result of these tariffs, only the Importer of Record (IOR) is eligible for a refund. So, if the importer paid a tariff at the port of entry and then raised prices on its imported goods when selling them in order to cover the tariff, that importer will receive an additional benefit through the refund process, which it may or may not choose to pass along to customers in the form of lower prices in the future.
Small businesses should be aware of the windfall that some of their suppliers are likely to receive from these tariff reimbursements. To the extent that the costs of tariffs were passed on to small business purchasers of their products, it is reasonable for these businesses to ask for price concessions on future purchases as compensation for their loyalty and sacrifice. The same argument could also be made by consumers who in turn purchased goods at elevated prices from the small businesses who purchased them from importers.
Future of Tariffs and Pricing
The Supreme Court ruled that IEEPA did not give the Executive Branch power to impose tariff policy in this manner. However, given President Trump’s commitment to maintain the use of tariffs as a point of leverage in his negotiations with foreign countries, and his willingness to reach for novel interpretations of existing trade law, it seems unlikely that he will abandon tariffs as an economic strategy. Section 122 of the Trade Act of 1974 allows for tariffs of up to 15% to be imposed for up to 150 days to correct “fundamental international payment problems.” This gives the President the ability to continue using tariffs and provides leverage in future trade negotiations. Section 301 of the Act would likely take longer to implement as it requires trade investigations which take time, but these tariffs would not be restricted to a 150-day time limit, making them more durable and sustaining. We believe that the President remains as committed to his tariff strategy today as he was when he entered office, and that small businesses are unlikely to see a significant drop in tariff rates during the Trump Administration without an act of Congress that defies the President’s wishes.
We do not expect those receiving refunds to reduce prices materially once refunds arrive for several reasons. First, the refunds are likely to be paid in a lump sum and will not be attributable to any specific transaction or relationship. Refund recipients are likely to treat the money as a one-time windfall which can be used to either reinvest in the business, or dividend out of the company for personal use. Second, tariffs on most imported products continue under other trade policies, and with consumers now used to paying higher prices for imported goods, we expect these new tariffs to be passed on to borrowers just as the now overturned tariffs were.
Broader Economic Uncertainty
The current economic environment is uncertain. A volatile tariff strategy, elevated oil and gas prices, supply chain disruptions, and a rapidly changing technology landscape combine to create tremendous uncertainty for small business owners. The biggest risks to the economy come from rising inflation which could lead the Federal Reserve to raise interest rates. If rising energy costs and supply chain disruptions lead to higher inflation, higher interest rates could follow, depressing growth and corporate earnings.
Oil Prices: Volatile oil prices are yet another shock to operating margins that small businesses need to contend with. Like with tariffs, small businesses are once again grappling with the impact of an unforeseen expense and agonizing over whether to pass these increased costs on to an already stretched customer base. We expect that small businesses will likely delay raising prices as long as possible – similarly to when tariffs were first introduced – but that businesses will ultimately need to pass these expenses on to customers should prices remain elevated.
Supply Chains: Supply chains have been unstable ever since Covid when demand changes, production challenges, and labor shortages sowed chaos throughout the world. Since then, global conflicts, including in Ukraine and the Strait of Hormuz, have combined to wreak havoc international shipping. With ongoing tensions in Iran, the fear is that more militant actors will emerge with the goal of disrupting global trade in search of profit.
Consumer Spending: Consumers can take some comfort in the fact that the CPI dropped slightly in the month of June and rose only 0.01% in July. However, inflation remains significantly above the annual targets set by the Federal Reserve, and most experts expect the recent declines to be temporary. If inflation continues to rise in the coming months, the Fed will come under increased pressure to raise interest rates, which will help slow inflation but will also slow economic growth. This could mean slower hiring and wage growth, adding to the loss of 23,000 jobs in July, which would in turn place pressure on consumer spending.
While inflation is impacting all consumers across nearly all goods, it is not impacting all consumers equally. We now live in a K-shaped economy where the wealthy minority drive growth in consumer spending and everyone else struggles to make ends meet. The recent inflationary spike led by higher energy prices due to the War in Iran is exacerbating this problem. Wealthy consumers are relatively immune to higher energy costs, and their impact on the goods they purchase, while less wealthy consumers see more of their discretionary income going to operating vehicles and buying groceries. The result is a bifurcated market for small businesses to target where one customer group continues to demand premium quality and service items while the other is looking for value and ways to reduce expenses.
Impact on Small Business Lending: Simply put, uncertainty in the economy leads to higher lending prices. If higher oil prices lead to reduced business margins, the market will react by demanding higher rates to compensate for an increase in risk. Small business revenue is made up primarily of consumer spending. Rising oil prices hit consumers directly by increasing non-discretionary spending like the cost to drive to work and heat one’s home. As a result, consumers cut back on the discretionary spending that small businesses rely on, thereby reducing cashflow and financial health.
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business finance.Kapitus provides growth capital to small businesses and has provided over $8.5 billion to over 50,000 small businesses since 2006.Kapitus offers multiple loan products to small businesses, including SBA loans, revenue-based finance, equipment finance, cash-flow based factoring, revolving lines of credit and invoice factoring.
