The Rising Relevance of Tariff Risk in Lending Portfolios

Recent rounds of proposed and implemented tariffs—targeting sectors including  apparel, electronics, household goods, and steel have reintroduced cost instability across main street industries. According to the National Retail Federation, these measures could reduce U.S. household spending by as much as $78 billion annually, with knock-on effects to small business sales and liquidity.¹

Simultaneously, data from the Port of Los Angeles—where container volume is projected to decline by 35% suggests supply chain disruption is actively reshaping the availability of goods and cost structures.² Small businesses reliant on imported goods or equipment now face higher inventory costs, longer lead times, and rising demand for working capital at exactly the moment that margins are under pressure.

Implications for Cash-Flow-Based Underwriting

Cash-flow-based lenders depend on the predictability of revenue patterns to price and collect repayments. However, the increasing volatility in margins and inventory cycles is undermining key assumptions in traditional underwriting models:

• Historical deposits are no longer predictive. Deposit stability over the trailing 90 - 180 days does not reflect tariff-induced cost inflation or supply disruptions.

• Margin compression is often invisible. Gross revenue may remain flat while profitability deteriorates; a scenario particularly risky for cash flow-based lenders.

• Repayment risk increases despite consistent sales. Even businesses with steady top-line performance may become over-leveraged when their cost of goods sold rises.

Similar to the disruptions experienced during COVID-19, these dynamics are reflected in the Federal Reserve’s 2024 Small Business Credit Survey, which reported elevated financial stress in retail, wholesale, and manufacturing sectors all exposed to an increase in imported input costs.³

Rethinking Underwriting and Portfolio Monitoring

To effectively manage emerging tariffs-related risk, lenders should evolve both pre-funding assessment and post-funding oversight. Key strategies include:

Segment-Based Tariff Exposure Scoring

Incorporate industry-specific import reliance into underwriting models. Identify businesses in tariff-sensitive NAICS codes and apply differentiated pricing or approval criteria.

Margin Sensitivity and Stress Testing

Supplement cash flow analysis with forward-looking margin stress tests. Simulate scenarios where cost of goods sold (COGS) increases 5–10% or more and assess resulting coverage ratios.

Post-Funding Real-Time Monitoring

Implement systems that track deviations in deposit volume, outgoing wire patterns (e.g., to freight or customs brokers), and balance volatility. Establish early-warning indicators and adjust servicing strategies accordingly.

Trade Exposure Disclosures

Insist on transparency when it comes to international sourcing, inventory cycle timelines, and logistics dependencies. Use this information to calibrate credit limits and repayment schedules.

The Path Forward: Resilient Underwriting in a Dynamic Trade Landscape

Tariffs are not a temporary anomaly. Regardless of the motivation, trade policy has reemerged as a core determinant of small business operating conditions. For lenders, the ability to anticipate and quantify the cash flow impact of these shifts will be the difference between portfolios that perform and those that experience avoidable losses.

Lenders that invest in contextual underwriting, data-driven monitoring, and tariff-aware scoring models will be positioned to lend with confidence even in a world where the cost of doing business changes rapidly.

Sources

1. National Retail Federation: Estimated Impacts of Proposed Tariffs
2. Washington Post: Port of Los Angeles Cargo Decline
3. Federal Reserve: 2024 Small Business Credit Survey
4. U.S. Census Bureau: International Trade Statistics

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