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.

Read also: Tariff Refunds: FedEx, UPS, and DHL to Issue Unexpected Refunds to Consumers

Tariffs

Recent filings show that the Trump administration has refunded $100 billion in tariffs struck down by Supreme Court in February, ruling that the Federal Government had illegally collected tariffs from importers in the United States using the International Emergency Economic Powers Act (IEEPA).

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.

Given President Trump’s commitment to maintain the use of tariffs as a point of leverage in his negotiations with foreign countries, it seems unlikely that he will abandon tariffs as an economic strategy.  Small businesses should be prepared to continue managing their business without significant tariff relief and should explore opportunities to source more materials domestically.  

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. 

The uncertainty caused by a sudden spike in oil prices and the lack of clarity as to the severity and duration of the spike will likely cause many small businesses to retrench, holding off on starting new projects, taking on new hires, and investing in the growth of the business, until the picture becomes clearer.  Given the importance of small businesses to the U.S. economy, this could have a significantly negative impact on the unemployment rate and overall GDP growth.

On the positive side, the U.S. has a robust oil and gas industry which employs many small businesses involved in both upstream and downstream production.  These businesses will benefit from higher prices which, if sustained for a long enough period of time, make additional oil and gas projects economically viable.  It is also important to note that as the largest oil and gas producer in the world, the United States is less exposed to economic disruption than many other developed economies, especially those in Europe and Asia.  As a result, it is likely that fuel costs will rise higher and faster in parts of the world where we are currently levying tariffs with the goal of driving production back to the United States.  If U.S. oil prices become a relative advantage to U.S. businesses, it may serve to speed the repatriation of manufacturing back to the U.S. during this period of instability.

Highly Impacted Industries: 

• One of the industries with the highest dependency on oil and gas prices is the transportation industry which includes long-haul trucking as well as short-haul and local delivery services.  Fuel oil is one of the transportation industry’s primary operating expenses, and operators will feel the impact of this disruption immediately.  
• The agriculture industry is also highly exposed given the diesel-powered heavy machinery used in production, the distribution costs required for products to reach consumers, and the fertilizer required to maintain crop yields.  
• Many small manufacturers also have significant exposure as oil and gas are often used directly in the manufacturing process or to generate electricity to power plants and equipment or in the production of raw materials such as plastic, aluminum and steel.  
• In addition, the construction industry has significant exposure to the petroleum markets given the heavy machinery used during the construction process and the building materials required in modern construction.  
• The restaurant industry will also experience higher fuel oil and cooking gas costs as well as higher food costs resulting from higher transportation costs and higher food production costs.

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

What Small Businesses Can Do

Over the past several years, small businesses have become all too adept at managing through crises. Many have learned the hard way the importance of keeping a close eye on margins, managing supply chains and cost of goods sold, and developing products that appeal to cost conscious consumers. Successful businesses today maintain options in their supply chain, their headcount, and in their access to capital. Many businesses today are investing in automation as a way to control more of their supply chain and reduce dependency on human capital. With recent advances in AI, many businesses are now adopting AI tools that help them connect with and manage customers, handle accounting and business analytics, and even develop software. 

Successful businesses also maintain multiple financial relationships capable of providing working capital to fund growth. Many also finance equipment purchases and maintain revolving lines of credit to manage the volatility of cashflows month to month. It is important for small businesses to maintain both bank and non-bank relationships to ensure access to a full suite of financial products.

Author Bio

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.