How small businesses can manage tariff costs

Tariffs affect businesses of all sizes, increasing the cost of imported goods and materials, and putting pressure on profit margins and cash flow. However, smaller companies tend to feel the impact the most, especially if tariff policies shift often or are alongside other pressures such as rising interest rates and higher financing costs.

That’s because smaller companies tend to lack the sophisticated supply chains, currency hedging strategies and access to credit that larger companies can use to weather volatility, explained Matt Stephani, president of Cavanal Hill Investment Management, Inc.

“When tariffs shift quickly, small businesses are at a disadvantage,” he said. “They simply don’t have the same financial cushion or operational flexibility. 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.”

One option is to raise prices, passing on the higher costs to customers, but that risks losing consumers who cannot or will not take another price increase, especially when consumers, too, are contending with high inflation and rising interest rates. Stephani noted that small businesses may have to act more reactively in this environment, waiting to see competitors’ prices and how consumers respond to them.

“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 owner contend with tariffs and the resulting impact to 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, it’s important to have 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, said Shawn Haynes, manager of business banking operations at BOK Financial®.

   "A period of uncertainty can reinforce the value of establishing credit before a business needs it,” he explained. “A line of credit can provide businesses with flexible access to working capital when inventory costs rise, receivables slow or expenses fluctuate. Having a working capital conversation with your banker early allows more time to evaluate options before liquidity becomes strained.”

   Most lenders evaluate several factors as they work with businesses on financing requests. These factors include credit history, cash flow, existing debt and collateral.

   For those small business needing financing alternatives, Small Business Administration (SBA) backed financing may be another option for eligible businesses,” suggested Haynes. “SBA programs support a variety of financing purposes and can offer flexible structures depending on the program and borrower. Business owners can talk with their banker to determine which options best fit their need."

   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
   Tariffs are meant to encourage businesses to begin manufacturing and sourcing in the U.S., but shifting supply chains in this way 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 local fashion designer or sewist 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.

The bottom line

Tariff policies remain fluid, but business owners do not have to wait for greater certainty before taking action. Understanding tariff exposure, protecting margins, reviewing supplier options and stress-testing cash flow while ensuring access to liquidity can help businesses adjust more quickly as conditions change.

“Small businesses should be having these conversations with their business banking relationship manager before financial pressures develop,” said Haynes.

Your banker can help think through working capital needs and financing alternatives, while also connecting business owners with other resources to help them navigate changing conditions".

- Shawn Haynes, manager of business banking operations at BOK Financial