President Donald Trump's tariff policy began affecting importers in April 2025, with a fresh set of duties taking effect on July 24. For small businesses that rely on imported materials or finished goods, that meant bigger bills and tighter cash flow.
The 2025 Federal Reserve survey found that 38% of businesses sought financing of various types, including bank loans, credit lines, and merchant advances - a figure in line with recent years. But the type of financing they are reaching for is shifting.
"It was pretty widespread," says Aharon Margolin, who runs Tariff Recovery Group, a firm that helps businesses get tariff refunds. He previously worked in alternative financing. "Obviously the importers who were paying those tariffs felt that pain directly."
He adds that the tariff payments became much larger, which squeezed cash flow and the bottom line. One cafe owner told him: "Everything's gotten so much more expensive, all my goods, and therefore cash flow is really tight, and we're taking additional capital."
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Traditional bank loans typically carry APRs of 6% to 12% for small businesses, making merchant cash advances dramatically more expensive in comparison. Yet many small firms lack the credit history or collateral needed for conventional financing, leaving them with few options when cash is short.
Merchant cash advances work differently from bank loans. Instead of an interest rate, the lender gives you a lump sum in exchange for a percentage of your future sales. The cost is expressed as a "factor rate" - typically between 1.1 and 1.5.
"Oftentimes, these loans create debt traps that force the borrower into multiple rounds of refinancing and stacking, and they get more and more complicated," Ami Kassar, head of the business loan advisory firm Multifunding, said. "They can have money, and then they're often stuck in a spiral, and they don't understand the effect of APR on the money, and it's really hard for them to get out of it."
Kassar calls the product "very manipulative," though he admits there are situations where it can make sense. "You have to see if there's anything else available," he says. "Sometimes they just have to slow down expenses and slow down payables."
One real example shows how painful these advances can get. For instance, Joshua Esnard, who owns The Cut Buddy hair accessories firm, took out three merchant cash advances worth $950,000 to pay tariff-related expenses, ultimately owing $1.2 million after fees.
There is some good news. In February, the Supreme Court invalidated the tariffs that Trump had imposed under the International Emergency Economic Powers Act, and a number of businesses are beginning to receive refunds. Margolin says that when the money comes back, it feels lifesaving.
Business owners who get their money back are relieved.
The bottom line: When costs jump and cash gets tight, fast financing can look like the only way out. But the price tag on that speed is often steep enough to make things worse. For anyone running a small business - the lesson is to look at every option before signing a factor rate agreement.
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