How to Use Business Financing to Help Deal With Tariffs
If you’re a small business owner in the United States, chances are you’re aware of recent trade tensions between the U.S. and China. As of this writing, President Trump has levied tariffs on $200 billion worth of Chinese goods, and is planning to add even more in the coming weeks.
What started off as a contained tariff on intermediate goods has spread to almost everything American businesses import from China. These tariffs will hurt all American businesses, but small businesses will have the hardest time surviving.
Small businesses don’t have many options for avoiding the extra costs, which could be as much as a 25% markup on some items, from toys to mobile phones. The alternative is to find other suppliers, such as American manufacturers, which may be as expensive as sticking with tariffed goods.
One tool that small businesses do have at their disposal is using business financing, and more specifically debt financing, as a preemptive or stopgap measure against rising costs.
Debt financing, such as business loans, lines of credit, and credit cards, are not long-term solutions. Business owners will need to pay interest on whatever money they borrow. But they may be a temporary solution, until tensions between the countries ease—or, a new president takes the reins and rescinds the tariffs.
Let’s explore how business owners can use business financing to stave off higher prices, cash flow gaps, and other issues.
How tariffs affect small businesses
Over 98% of the businesses in the U.S. are small businesses, and they employ nearly half the working population.
Many small businesses import their goods and materials from China, due to lower prices. In an attempt to put pressure on the Chinese government for “unfair trade practices,” the Trump administration has added tariffs to the cost of imported Chinese goods.
Buyers of the goods (in this case, American businesses) pay these tariffs, not the Chinese suppliers. But the higher prices could mean fewer American businesses buying those goods, hurting the Chinese economy—in theory.
Whether this tactic is sensical or effective is up for debate. At present, American businesses are the biggest losers, as they’ll have to choose between finding new suppliers (who may not deliver the same quality as Chinese manufacturers), or passing those costs on to their customers (who may not be willing to pay higher prices).
Many small business owners and industry leaders are testifying in an attempt to dissuade the Trump administration from adding more tariffs, but to no avail yet.
How businesses can use financing to deal with the tariffs
As mentioned above, there is little long-term recourse for dealing with these higher prices. The hope is that by using financing as a lifeline, business owners can find stopgap solutions that last until the tariffs are gone, or they can find new quality suppliers to keep costs reasonable.
Here are a few examples of how to use financing:
Use a loan to stock up on inventory now
One way to get ahead of the tariffs is to use small business loans to buy as much inventory as possible now, to get the best possible deal on your needed goods.
This is a common use for a small business loan. Traditional lenders such as banks and online lenders alike extend term loans—with varying interest rates, term repayment lengths, collateral needs, and other variables—to small business owners who want to get good deals on inventory.
If you have the means to hold on to a large amount of stock that can get you through an extended period of time—or can find extra warehouse or storage space at a reasonable price—this isn’t a bad option. The question is whether the interest rate you would pay on your loan would be less than what you would pay on your regular orders plus tariffs.
Some term loans from online lenders have high interest rates. The upside is that you can be approved for some loans in as little as one business day. If you want to get moving on this concept, you can do so today.
Term loans from banks and through the SBA program (more on that in a moment) are less expensive but have a more arduous underwriting process. If you gather all the documents you need quickly, and have the background to qualify for a good loan (a high personal credit score, a long time in business, proof of cash flow and revenue), you can turn a bank loan around in under a week, in some cases.
Use a line of credit to extend your payment period
One of the most popular forms of business financing is a business line of credit (LOC). A line of credit is access to a pool of money that you can draw from, replenishing your pool as you repay your draws.
Business owners prize LOCs for their flexibility: You can apply for one, get approved, and keep it in your back pocket without paying a cent until you draw on it.
This is an excellent form of financing to have ready for one of two scenarios: Use it ahead of an increase in prices the way you would a term loan, or use it once tariffs have taken effect, in order to give yourself more time to pay off the increased costs.
The second scenario is not sustainable long term. It may help you have a more balanced and consistent cash flow in the short term, however—and cash flow mismanagement is the number one reason why small businesses fail, according to a study by U.S. Bank.
Use a credit card to finance purchases
Credit cards are like lines of credit in that they give you access to a pool of funds, which replenishes as you repay. Though your credit limit will likely be lower for a credit card than a line of credit, you may get the added benefit of reward points that you can reinvest in your business.
Some qualified business owners can look into a business credit card with a 0% introductory APR, which means they’ll pay no interest on their purchases throughout the life of their offer—sometimes as long as a year. If your account in good standing with minimum payments, you’ll have access to an interest-free loan throughout until the offer ends. This is an excellent way to defer payment on more expensive goods until things potentially settle down.
Use an SBA loan to refinance debt
As mentioned above, the Small Business Administration has a loan program with some of the best interest rates and repayment terms of any small business loan product. One of the best uses for an SBA loan is to refinance your existing debt, making it more affordable and manageable.
As long as you meet the SBA qualifications and can show revenue, you’ll be eligible to refinance your more expensive debt (from credit cards or LOCs, for example) and pay it off over a term that lasts as much as 10 years, or more in some cases.
In 10 years time, it’s possible the tariffs will be off the table, or supply chains will have shifted to other countries, such as Vietnam or Indonesia, where today (but perhaps not in 10 years) quality is lacking compared to in China. This is a long-term play that is partially guaranteed by the federal government, making it a good bet for all business owners.
Small business ownership is all about taking risks, but no risk is bigger than taking on debt to finance your business goals. If you’re considering business debt financing, be sure you have a plan to pay off your loan before agreeing to any sort of deal. Even though many small business owners may need to take on debt by forces beyond their control, there will be no bailout for them—so tread lightly and keep your options open.
Eric Goldschein is an editor and writer at Fundera, a marketplace for small business financial solutions such as small business loans. He covers entrepreneurship, small business trends, finance, and marketing.