The Tariff Squeeze: Why More Small Businesses Are Borrowing to Stay Afloat

More than four in 10 small-employer firms say tariff-related cost increases have hurt their bottom lines in the past year, according to the Federal Reserve’s 2026 Report on Employer Firms. The pain is concentrated in two industries: retail (69%) and manufacturing (62%). For a growing number of owners, the response isn’t just to raise prices or shop for new suppliers; it’s to borrow capital.

This guide breaks down which industries are hit hardest, why financing is becoming part of the response, and how to think through whether borrowing makes sense for your business.

Tariffs raise the price of imported goods and materials, and for small businesses that source inputs from abroad, that cost shows up almost immediately, often before a business has any ability to adjust prices or contracts.

According to the Federal Reserve Bank's 2026 Report on Employer Firms:

• 77% of small employer firms cited rising costs of goods, services, or wages and/or tariff-related cost increases as a financial challenge in the prior 12 months.
• Nearly half of all surveyed firms source at least some inputs from outside the U.S.
• A large majority of those firms said input prices rose from 2024 to 2025.

The cost isn't abstract. A Center for American Progress analysis of U.S. Census Bureau trade data found:

• Average small-business importer: Paid roughly $306,000 more in tariffs between March 2025 and February 2026 than in the prior 12-month period, about $25,500 in added monthly costs.
• Smaller "mom-and-pop" importers (firms with fewer than 50 employees): Absorbed an average of about $175,000 more over the same period.

When costs rise faster than revenue, businesses don't have many options. They can raise prices, cut expenses elsewhere, absorb the hit, or borrow to cover the gap while they figure out a longer-term fix. For a growing share of owners, borrowing isn't a last resort, it's become part of managing day-to-day cash flow while tariffs squeeze margins.

What the data shows:

• 60% of small employer firms applied for financing in the 12 months leading up to the Fed's 2026 survey.
• 56% of applicants borrowed to meet operating expenses, not to fund growth or expansion, a sign that financing is filling a gap, not fueling ambition.
• Getting approved isn't guaranteed. Only 42% of applicants received the full amount they asked for, 36% received a partial amount, and 22% were turned down entirely.

Are Businesses Raising Prices and Borrowing at the Same Time?

At the same time, more small firms are raising prices. The NFIB's Small Business Economic Trends survey found the net share of firms raising selling prices climbed to 32% in February 2026. But credit conditions haven't loosened to match, owners' expectations of easier credit stayed negative over the same period.

In other words, businesses are pulling both levers, raising prices and borrowing, at the same time lenders are staying cautious.

Not every small business is affected equally. Tariff exposure tracks closely with how much of a business's cost structure depends on imported goods.

Source: Federal Reserve Bank's 2026 Report on Employer Firms

Retailers are exposed because so much of what they sell is manufactured or assembled overseas. Manufacturers are exposed on the input side, things like raw materials, components, and parts that get taxed at the border before a single unit ships. Both industries also tend to operate on comparatively tight margins, which means even a moderate tariff increase cut into profitability.

Small business owners facing higher input costs generally choose from a handful of strategies, and most are choosing the path of least resistance in the short term. Among firms with foreign-sourced inputs, the Fed's survey found:

Source: Federal Reserve Bank's 2026 Report on Employer Firms

Structural changes like reshoring or re-sourcing are rare, mainly because they require:

• Time: New supplier relationships don't materialize overnight.
• Capital: Reshoring or switching suppliers often means upfront investment.
• New relationships: Vetting and building trust with a new supplier takes real effort.

That's where financing tends to enter the picture, not as a permanent fix, but as a way to buy time while a business adjusts pricing, renegotiates with suppliers, or waits out a policy change. Borrowing to cover a cost spike you probably can't keep up with could do more harm than good.

The right type of financing depends on whether the cost pressure is temporary or ongoing. Here are some options small business owners have, and the pros and cons of each:

• Business line of credit: Best suited for recurring or unpredictable cash flow gaps, since a business only draws, and pays interest on, what it actually needs. Useful for retailers managing seasonal inventory costs that have gotten more expensive.
• Term loan: Better for a known, one-time cost increase, such as a large inventory order affected by a new tariff rate, where a business needs a lump sum with predictable repayment.
• SBA loan: May offer more favorable rates and terms for businesses that qualify, though approval can take longer, a tradeoff worth weighing against how urgent the cash need is.
• Invoice financing or merchant cash advance: Can provide faster access to cash but often carries higher costs. That's worth factoring in, since the Fed survey found borrowers using online lenders were far more likely to report higher-than-expected costs (60%) than those borrowing from small banks (37%) or large banks (32%).

Before applying for financing to cover tariff-driven costs, it's worth asking a few questions:

• Is this cost increase temporary (tied to a specific tariff or trade action that could change) or structural (a permanent shift in the cost of doing business)?
• Can the business realistically pass some of the cost to customers without losing sales?
• Does the math work if the loan is repaid using current revenue, or does it depend on costs coming back down?

Treat a tariff-driven loan like any other risk you're choosing to take on. Before you borrow, name the specific scenario that would make repayment hard, like a further tariff increase, a slow season, or a supplier price hike. Then decide in advance how the business would handle it.

Financing works best as a bridge, not a crutch. It makes sense for a business with a clear plan to restore margins within a defined period. Whether that's through pricing adjustments, supplier changes, or efficiency gains. It's a riskier move if you're borrowing simply to delay a decision you'll eventually have to make anyway.

Every business's financial position is different. Talk to a lender or financial advisor about what's realistic for yours.

Tariffs have moved from a policy headline to a line item on small business balance sheets, and for retailers and manufacturers especially, that line item is increasingly being covered with borrowed money.

Financing can help a business bridge a temporary cost shock, but it works best paired with a clear plan for how margins recover, not as a substitute for one. If you're weighing that option, it's worth taking time to compare business loans before you commit to one.

Where We Got Our Information

• Federal Reserve Banks: 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey, published March 3, 2026. Survey fielded September 3–November 14, 2025; 6,525 responses from small employer firms nationwide.
• Center for American Progress: "In the First Year, President Trump's Tariffs Have Cost Small-Business Importers $306,000 on Average," analysis of U.S. Census Bureau trade data, March 2026.
• NFIB, Small Business Economic Trends (SBET) survey: 2026 monthly reports.