Combatting rising business costs due to tariffs

As the Trump administration’s tariffs go on a rollercoaster of ups and downs, small businesses are scrambling to keep up with the fluctuating cost of goods imported from other countries. It could be the breaking point that puts them out of business.

“Tariffs tend to hit small businesses harder than large corporations,” said Matt Stephani, president of Cavanal Hill Investment Management, Inc. “Smaller firms often lack the sophisticated supply chains, currency hedging strategies and access to credit that larger companies rely on to weather volatility.”

Unlike corporations that order goods in large quantities, small businesses tend to order in limited batches. Many had been using the “de minimis exemption,” which allowed goods from China and other countries valued at or under $800 to enter the U.S. free of duties (tariffs). However, that loophole closed on May 2, raising the cost of importing goods beyond what business owners had planned for or expected.

“When tariffs shift quickly, small businesses are at a disadvantage—they simply don’t have the same financial cushion or operational flexibility,” said Stephani. “That creates a challenging environment for smaller players, especially when competing against much larger rivals that can pivot suppliers more easily, often absorbing the shock.”

Pricing difficult amid tariff changes, ongoing effects of inflation
Small business owners, especially those that ordered inventory when the China tariff of 145% was in effect in April (it’s currently at 30% during a 90-day pause) are now walking a fine line to figure out how to price their inventory so they make a profit but also not so high as to turn off customers. Even reduced tariffs can drastically affect small business margins, adding insult to injury for those who already have had to weather the storms of inflation the past few years. Some small business owners worry consumers will not take another price increase.

“Where large businesses often have complex, more sophisticated pricing models, small businesses may not. As a result, small businesses may have to act more reactively in this environment, waiting to see competitor and customer responses to higher prices,” said Stephani.

“This kind of trial and error with pricing adds risk to small business and has contributed to our current climate of uncertainty.”

- Matt Stephani, president of Cavanal Hill Investment Management

So how can a small business prepare for and handle a massive, unexpected increase in their inventory costs? Here are some possible places to start:

1. Look at where to cut spending
Small business owners may be looking into cutting employees to open up funds for higher-priced inventory, ultimately impacting the job market. However, rather than immediately laying off staff, business leaders may first want to review all expenses, see what could be renegotiated and shop around for cheaper alternatives to online tools, systems and services for bookkeeping, marketing and other operations.

Stephani also recommends stress-testing. “Run scenarios where costs spike or supply is delayed, and plan how to respond. These steps don’t eliminate risk but can make a business far more resilient when the unexpected hits.”

2. Consider additional funding
If nothing is left to cut from expenses, there need to be backup sources of funding to carry a business through lulls and periods of uncertainty. This highlights the importance of having an emergency fund or contingency plan.

Businesses can create this fund when times are good by putting a certain percentage of sales into a separate high-interest savings or money market account that stays liquid to pull from in times of need.

Another option is a small business line of credit. “Establishing a line of credit can help provide a small business flexible access to funds, allowing for smoother cash flow management during periods of variable income or fluctuations in expense if the business qualifies,” said Shawn Haynes, senior director of business banking growth and strategy at BOK Financial®.

Most lenders require that business owners demonstrate they’ve been operating a business for at least two years. Owners also must provide a business plan and financial paperwork that shows stability, profits and a high credit score to demonstrate ability to repay the loan.

“For those small businesses that struggle to meet traditional financing requirements, the Small Business Administration (SBA) is another great resource,” suggested Haynes. “SBA provides access to various loan programs which can be particularly beneficial to new businesses needing capital to grow plus resources to small business owners seeking advisory and guidance.”

Business owners could also consider adding other income streams, such as a new service. For example, a clothing boutique owner might add a personalized styling experience, a restauranteur could offer catering options, or a car dealership could add high-end detailing service to generate extra revenue.

3. Stay open to alternative sourcing
The Trump administration is pushing for businesses to begin manufacturing and sourcing in the U.S., but that comes with its own potential issues, expenses and a long ramp-up period. Still, business owners need to stay open to alternative channels for acquiring inventory and materials required for their business.

“Small businesses should seek to diversify suppliers to avoid overreliance on one country,” said Stephani.

One local method of alternative sourcing is through local sourcing and second-hand markets. For example, a clothing boutique owner could work with a fashion designer or sewist to acquire fabric on Facebook marketplace or use clothes from thrift stores. A furniture store could work with a local woodworker or refinisher to create or upcycle used pieces of furniture to fill their showroom. A gift store could partner with local makers or creators to fill their product line with locally made items.

Companies are also revisiting a forgotten U.S. customs law that allows importers to use the lowest cost of a good to calculate import duties known as the “first sale rule.”

The bottom line
With the future of tariffs still unknown, small business owners may have to learn some hard lessons in staying flexible, having financial backup plans and maintaining customer loyalty.

“Small businesses should be actively meeting with their business banking relationship manager to discuss any challenges they are encountering with tariffs and uncertainty,” said Haynes.

“This allows the relationship manager to do what they do best: provide advice and guidance, and serve as a connector for their client.”

- Shawn Haynes, senior director of business banking growth and strategy