How Tariffs Can Affect Your Business and How Financing Can Help

The recent tug-of-war among nations over who can impose more, and weightier, tariffs has left companies either at an advantage or reconsidering their business strategy.

To date, the trade war between the US and China may be the fiercest battle yet between foreign powers to derail the lucrativeness of the other’s exports in the opposer’s home country.

The U.S. has already imposed hundreds of billions of dollars worth of tariffs on Chinese imports, including textile, computers, aircrafts, vehicles, industrial machinery, medical devices and technology. China has retaliated with similar measures of taxation, targeting US-based products like liquefied natural gas, food and beverages, and vehicles.

Apart from the tit-for-tat tariffs issued by the U.S. and China, other foreign countries are falling into a similar scheme with the American administration. In fact, the U.S. began their taxing tirade in May when it announced its first round of tariffs on aluminum and steel exports from European Union member nations, Mexico, and Canada. Immediately after announcing these tariffs, the countries made it clear that they would be issuing their own tariffs in retaliation.

Aside from levying steel and aluminum tariffs against Canada, the U.S. also tacked on tariffs to lumber imports from its northern neighbor. The administration is planning to add automobile taxes to the list of tariffs levied against the EU member nations.

What is a Tariff

A tariff is a tax placed by a government on imports and, in some cases, exports. Tariffs can be imposed as fixed dollar amounts on certain goods like steel, known as unit tariffs, or as a percentage based on the assessed value of a product or service, which by nature changes according to market factors. This second, variable type of tariff is called an ad valorem tax and is levied in proportion to the shifts in assessed value of a product.

Governments impose tariffs for myriad reasons, but these duties are especially instrumental in raising revenue in the taxer’s home country and de-escalating competition by foreign companies. When applied, this taxation approach jacks up the price of imports, making them less attractive, at least economically speaking, than their “made here” alternatives.

Though tariffs mean well for domestic companies, they can produce boomerang effects that leave businesses searching for new suppliers and suffering the blow from retaliatory tariffs abroad, which slap expensive price tags on their exports sold in foreign countries.

How Tariffs Will Affect Small Businesses

Though it’s true that some companies, like large steel manufacturers, in the U.S. are enjoying a heyday of sorts now that their prices are more attractive than those of their foreign counterparts, others are rethinking their supply chain partners, especially their suppliers based out of China.

On the farming front, American farmers, who are reliant on export revenue, have seen their sales in decline abroad due to the backlash of tariffs. According to free trade organizations, the agricultural industry typically depends on exports to earn about 20 percent of their total revenue.

Outside of the U.S., a strain on cash is similarly afflicting the business community, especially on those companies selling products on the U.S. tariff list.

These events can impact large corporations and small businesses alike. Small businesses are the largest job creaters in the U.S. and their workers contribute over 45 percent to the private workforce. Besides the cash flow problems tariffs cause for these businesses, the current economy will also experience a hit to economic growth, employment rates, and wages.

Choosing the Right Financing Option

To deal with the price hikes tariffs are causing for foreign products sold on American soil and vice versa, financing can be the band-aid your company needs to weather the storm.

Though bank loans are one option to help your business get through its financial trouble in the current trade climate, alternative methods of financing, like international factoring and full supply chain financing, are other avenues that can provide financial assistance to your company at a time when liquidity reserves are tight for many.

Though applying for bank loans often means jumping over hurdle after hurdle of regulations, international factoring companies such as Tradewind Finance can provide you with a significantly higher financing facility than your bank with an easier application process. If you don’t qualify for bank services, factoring companies can finance you as they primarily focus on leveraging the credit of your clients or your entire supply chain.

What’s the upshot of these services, then, for U.S. companies with suppliers in China, for instance? Through supply chain finance, the U.S.-based buyer finances its payables, thereby allowing it to extend the date when payment is due to its supplier. Once invoices from the supplier are approved by the buyer, the supplier sells these receivables at a discount to a factor or other financial institution it works with and in turn receives early payment from them. The buyer then pays the factor upon invoice maturity.

This arrangement not only cushions the buyer with more cash, but it also allows for a strong relationship between the buyer and the supplier, who also benefits from early payment.

When a government puts heavy tariffs in place, small businesses are gravely under pressure because of decreasing commodity prices and increasing input prices. In the market, many startups and small companies will face financial trouble because the tariffs could target well over half of their entire inventory.

For these export companies, the factoring portion of supply chain finance might be the leg up they need to stay financially healthy.  Factoring is a type of financial transaction in which a business sells its invoices to a factoring company at a discount, and the factor, in turn, advances up to 90% of the value of the invoices upon shipping, on day 1, so the business doesn’t have to wait 30, 60, or 90 days to get paid. Once the invoice is paid upon invoice maturity by the buyer, the factor sends the remaining balance to its client.

The fast funding that factoring provides to small and medium-sized companies not only improves their cash flow position and access to working capital, but also allows them to better approach large international buyers as they are able to propose and accept open account terms.

Changes in trade policy can negatively impact small and medium-sized businesses most of all. Market experts are advising that these business owners gear up to prepare for these new tariffs and seek out assistance from financing institutions like international factoring companies to manage cash flow.