Tariff challenges: Navigating cash flow pressure in uncertain times

In the first and second part of our four-part series on tariff solutions, we explored capital strategies to help protect margins and momentum and supply-chain scenarios that keep goods moving and costs in check. Next, we dive into the critical role of cash flow management in navigating tariff uncertainty, with practical guidance on how business leaders can optimize their working capital, mitigate risk, and position their companies for long-term growth.

When to adapt your cash flow strategy

Tariff-related cash flow pressure can have devastating impacts on even the most well-run businesses. The ability to adapt quickly to changing market conditions and access liquidity when needed is the difference between weathering the storm and struggling to stay afloat. At KeyBank, we’re helping our clients build a solid game plan to manage their working capital, fortify their liquidity, and build flexibility into their contracts. First, let’s look at how one consumer electronics business can adapt its strategy.

Scenario 1: Sudden tariff hike strains inventory funding

A surprise tariff hike can send shockwaves through a company's supply chain, leaving it scrambling to cover unexpected inventory costs. For a consumer electronics importer, a 10% tariff on key components is a scenario that will strain already-thin cash reserves. With inventories often tied up in transit or sitting in warehouses, a sudden tariff hike could quickly turn a manageable cash flow situation into a full-blown crisis — but it doesn’t have to.

The challenge

When this new 10% tariff on key components takes effect, the consumer electronics importer is immediately faced with rising inventory costs and potential shipment disruptions. Without warning or time to adjust planning, the company's procurement team is scrambling to find alternative suppliers and renegotiate existing contracts. But every delay means lost sales, lost revenue, and a growing cash flow gap.

The solution

Having a ready source of liquidity can be a lifeline. With a line of credit in place, the company can quickly respond to changing market conditions and avoid a costly inventory stockout.

To help this electronics importer weather a sudden tariff hike, a tailored financial solution can provide:

1. A revolving line of credit, giving the importer flexible access to funds to cover higher inventory costs and seize stock before further price hikes.

2. Guidance from KeyBank’s trade finance experts can help the company:

• Optimize inventory management processes.
• Identify opportunities to reduce costs and free up working capital. For example, the company may be able to negotiate better terms with its suppliers or take advantage of duty drawback programs to recoup some of the costs of the tariff.

Additionally, KeyBank's treasury management team can help the electronics company implement a cash flow forecasting tool to better manage its working capital and anticipate potential cash flow shortfalls. This can help the company make more informed decisions about inventory levels, payment terms, and other key aspects of its cash conversion cycle.

The result

With a line of credit in place and access to a team of trade finance experts, the company can: 

• Maintain inventory flow and avoid stockouts.
• Reduce costs associated with inventory carrying and storage.
• Improve relationships with suppliers and customers.
• Increase cash flow and working capital.

Scenario 2: Bridging cash gaps from slower customer payments

When customers delay payments due to their own tariff impacts, the ripple effect can be felt throughout the entire supply chain. For a machinery distributor, this scenario is all too real. With thin profit margins and a complex web of supplier relationships to manage, even a minor disruption in cash flow can have far-reaching consequences.

The challenge

The resulting delay in customer payments caused by tariffs creates a cash flow gap as the distributor faces higher landed costs. With payments slowed, the distributor is struggling to pay its own suppliers on time, putting its relationships and reputation at risk. The distributor's accounts receivable team is working overtime to get paid by customers, but the delays are piling up, and the company's cash reserves are dwindling fast.

The solution

In this scenario, working with a bank that can provide a well-structured working capital loan can be a game-changer. Through a combination of solutions, the machinery distributor can manage delayed payments due to tariffs:

1. KeyBank delivers a working capital loan tailored to the distributor's needs, bridging the gap between paying suppliers and collecting from customers. By providing a short-term injection of liquidity, the distributor can meet its obligations and maintain its strong relationships with suppliers and customers.

2. KeyBank's trade finance experts can help the distributor optimize its accounts receivable and payable processes to reduce the risk of future cash flow disruptions. For example, the company may be able to negotiate better payment terms with its customers or take advantage of invoice discounting programs to accelerate cash flow.

The result

By leveraging this solution, the machinery distributor can weather the storm with ongoing benefits that help:

• Maintain supplier relationships and reputation.
• Reduce the risk of stockouts and inventory carrying costs.
• Improve cash flow and working capital.
• Increase confidence to avoid future disruptions.

With access to a working capital loan, the company can maintain financial stability and emerge with a stronger balance sheet. 

Scenario 3: Unlocking liquidity from receivables and inventory

For companies with significant inventory and receivables, rising tariffs on raw materials can be a double-edged sword. While passing on increased costs to customers can provide temporary relief, it also risks depleting cash reserves and disrupting operations.

The challenge

A packaging company holds significant inventory and receivables, but rising tariffs on raw materials have maxed out its traditional credit line. With no room to breathe, the company is struggling to absorb the impact of higher costs and maintain its cash flow. The company's cash conversion cycle is already stretched thin, and the additional costs of the tariff hike are pushing it to the breaking point.

The solution

In this case, an asset-based lending (ABL) facility can help the packaging company — even if it has already maxed out its traditional credit line.

To unlock the necessary cash flow, an ABL facility can enable the company to:

1. Borrow against inventory and receivables at a higher advance rate. This approach, supported by KeyBank’s lending expertise, helps the company absorb tariff-driven cost shocks and continue fulfilling customer orders without financial strain.

2. Streamline inventory management to free up working capital. For example, the company may be able to implement just-in-time inventory management techniques or take advantage of inventory financing programs to reduce carrying costs with guidance from KeyBank.

The result

By implementing these changes, the packaging company can continue fulfilling customer orders without financial strain, while this new structure allows their business to:

• Unlock millions in hidden liquidity from inventory and receivables.
• Absorb tariff-driven cost shocks without straining cash flow.
• Maintain pricing power and defend margins in a volatile market.
• Improve cash flow and working capital management.

Final thoughts

The current U.S. tariff environment is a perfect storm of uncertainty, and cash flow pressure is just one of the many challenges that middle market business leaders face. But with the right strategies and solutions in place, companies can weather the storm and even come out stronger on the other side. By fortifying their liquidity, building flexible contracts, and maintaining a solid working capital position, businesses can navigate the choppiest conditions with confidence.

By working with a bank that understands the complexities of trade finance and has deep expertise in cash flow management, businesses can build the kind of resilience they need to thrive in today's market. Whether it's providing access to liquidity, bridging cash gaps, or unlocking hidden value in receivables and inventory, KeyBank is here to help.

Read our latest insights to learn how other commercial business leaders are using these 7 recommended strategies to combat tariff volatility and drive growth.