Tariffs pose 'COVID-type' harm for small-business payments

David Paul Morris/Bloomberg

Payment companies that offer credit to small businesses will have to dust off or improve their pandemic-era strategies to manage the stress from Trump's tariffs.

The sweeping tariffs, which were announced last week, have prompted a sell-off in the stock market and fears of a recession. The 35 million small businesses in the U.S. may face particular challenges given their relative lack of scale that may make it difficult to manage spikes in prices or sudden shifts in supplies.

"We're looking at the law of unintended consequences. We may see a 'COVID-type' impact on supply chains, and then have prices going up," John Meyer, a managing director at Cornerstone Advisors, told American Banker. "Much like the beginning of the pandemic, you'll have not just higher prices for supplies, but also uncertainty about the supplies."

The tariffs and the downstream effects on supplies will increase costs and complicate treasury management for all businesses to some extent. Industries such as construction are particularly exposed and are usually composed of small businesses.

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"We should all be preparing in the short term for this, but it will be very hard for small businesses," Aditya Narula, senior vice president and general manager of lending and credit at Bluevine, a digital banking platform for small businesses, told American Banker.

More than 68% of construction businesses have five or fewer employees, according to OOMA, a small-business communications company. And 77% of homebuilders have 15 or fewer employees, according to the National Association of Homebuilders. 

"The tariffs will hit manufacturers hard, anyone that uses sheet metal or materials like that," Meyer said. Canada is a major exporter of timber to the U.S., for example, stressing a key resource for builders. "In some way these costs will be passed on to contractors," Meyer said.

Lenders that do business with construction companies can expect a spike in requests for credit, applications for larger credit lines and potential difficulties in paying off the lines. "If you're a lender, you need to be thinking about how to increase credit lines while pushing the businesses for better resources management," Meyer said.

While small business is a major source of income for banks, payment technology companies have made gains in recent years by offering short-term credit to small businesses, using fast decisioning and digital funding to compete with banks — and using a portion of future payment flows as a way for the businesses to pay off the loans. American Express, Square and PayPal are three of the largest firms in this finance category.

"Rising costs is at the top of the list for manufacturers," Michelle Gill, executive vice president and general manager of PayPal's small to medium financial services unit, told American Banker. "For small businesses it's hard to compete against the larger enterprises."

PayPal has improved its data sourcing over the past 18 months to improve vetting for borrowers and add speed to loan decisions and funding, Gill said.

PayPal, which offers payment products for both business clients and consumers, has made over 1.4 million loans to more than 420,000 business accounts globally through its merchant lending solutions, and in March passed $30 billion in total originations since its credit product launched in 2013. 

"Small businesses don't have the time to sit across from a bank teller," Gill said, also adding companies that are financially struggling will be more prone to "jump through hoops" to get credit.

Block, which retains its original Square brand for its business-facing products, did not respond to a request for comment. American Express declined to comment. American Express in the past has categorized small-business lending as a long-term strategy that would not be subject to short-term trends and has said it would consider any economic-driven small-business retreat by banks as a competitive opportunity.

For firms that are extending credit to small businesses, it is vital to vet borrowers based on signs that they were preparing their supply chains for potential problems in the event of tariffs given that Trump made tariffs part of his campaign in 2024, Bluevine's Narula said.

While the size and scale of the tariffs may be a surprise, they were part of the economic discussion well before Thursday.

"The good businesses were planning ahead," Narula said.