On April 2, 2025, after the close of the markets in the U.S., the Trump Administration declared it was “Liberation Day” and imposed nearly global tariffs in an amount and breadth unprecedented in the modern era. Some commentators opine that it is the most aggressive use of tariffs since the Smoot Hawley tariffs of 1930, credited with deepening the Great Depression. The tariffs announced principally were to take effect on April 9th and, with the promised retaliation by our trading partners, appeared to have launched a global trade war, sending markets into freefall on April 3 and 4, continuing during the week of April 7. However, on April 9, the Administration pulled back on tariffs other than as to China, which sent markets sharply back up that date. On March 31, JPMorgan Chase increased to 40% its prior predictions of the chance of global recession in 2025. Historians will have the luxury of time to assess the consequences of the tariff turmoil, but businesses need to do it now. And they will need to do it in an atmosphere of real volatility. The risk of even drafting this article is that the Administration will turn on a dime and reimpose the tariffs or pull them back again within a few days. Businesses will still face the challenge of planning what is next in an era in which we have been promised unpredictability. You cannot control the Administration, our trading partners, or the trade war, but you can take several concrete steps to better position your business in the coming days.
1. Assess Your Customers’ and Suppliers’ Exposure To The Tariffs. Virtually every business has exposure. It will simply be more obvious in some sectors than others. Are your customers and suppliers heavily concentrated in areas with the most exposure – agriculture, automotive, transportation and others? Are they heavily concentrated in particular supply chains?
2. Understand Who Your Backup Suppliers Would Be. How exposed are you to a supplier’s chapter 11 bankruptcy or, worse, immediate shut-down. Do you have realistic alternatives?
3. Know Your Contracts. Do you have pricing adjustment provisions in your contracts by which you sell goods – i.e., the good news? Do your suppliers have pricing adjustment provisions in the contracts by which you buy goods – the not-so-good news? Build adjustment terms into your sales contracts if you can. Where your sales are more based on individual purchase orders than a longer term contracts, you will have more price flexibility, if your customer market can bear it.
4. Be Prepared For Deals To Be Re-traded. Plan your reaction when customers and tenants reach out to renegotiate sale and lease terms. If you give concessions, get releases and other agreements that there is no defense to the remaining receivables.
5. Follow-up Quickly With Customers Who Fall Behind. Receivables are not like cabernet. They do not get better with age. If your customer is struggling, it will begin robbing Peter to pay Paul, and you will need to decide which you would rather be. A tightening of payment terms can increase the risk of preference exposure in your customer’s later Chapter 11. However, the only way you prevent that exposure entirely is not to get the money or get it all COD or payment in advance. If you offer terms, you will have some risk.
6. Understand The Guaranty Risk To Your Suppliers. Many small business owners will have signed onto a guaranty attached to a credit agreement a few years ago and then forgotten about it. Go through your contracts now to determine where your principals are exposed.
7. Understand Your Credit Risk With Your Own Lender. Where are you at risk of non-payment defaults? What covenants may be tripped by aging AR, or concentrations in troubled industries? Do you have a maturity date coming up soon by which your lender will decide to renew or suggest you move the relationship? Do you have available lines of credit?
8. Know Your Credit Insurance Policies. If you have credit insurance for receivables unpaid by an insolvent customer, get that policy out, know its terms and assemble your documentation concerning the affected customers and sales.
9. Have A Chapter 11 Plan. If one of your major suppliers files for protection under Chapter 11, do you want the contract assumed or would you prefer to go elsewhere? Are you holding any funds that might be set off against amounts you owe that supplier (usually with court permission)? If your customer files Chapter 11, what do you do about goods in transit on the day that you learn? Do you want to be a Critical Vendor (because there is a price)? How much preference exposure do you have on a quick and dirty analysis?
10. Have Counsel Ready. Insolvency is not a DIY project for most businesses and particularly not when your major customer or supplier lands in Chapter 11. In Chapter 11, if you are not at the table, you are likely on the table. Talk to your trusted insolvency counsel, have them run conflict checks on customers or suppliers teetering on the brink. Get their view on who you will use as local counsel in the major filing venues (New York, Delaware, Houston).
