The Tariff Crisis and Small Business Bankruptcy Risk

The Trump-era tariffs, initially framed as a tool to protect domestic industries, have instead catalyzed a cascade of unintended consequences, particularly for small businesses and the private credit markets. As the U.S. economy navigates the fallout of these policies, the interplay between trade restrictions, corporate insolvency, and systemic financial risks has become a critical concern for investors and regulators alike.

The Tariff-Driven Strain on Small Retailers

Small retail businesses, especially those reliant on imported goods, have borne the brunt of Trump-era tariffs. According to a report by , small U.S. retailers faced "holiday supply chaos" in 2025 due to tariffs on Chinese imports, leading to delayed orders and dangerously low stock levels. Data from business analytics firm RapidRatings reveals that operating margins for small retailers with assets under $50 million plummeted to negative 20.7%, with 36% of these businesses at high risk of bankruptcy-tripling the rate for large retailers (12%).

The economic burden is not hypothetical. A 2025 analysis by the American Action Forum estimates annual tariff costs for U.S. small businesses at $85.2–$99.6 billion, with sectors like apparel and custom merchandise particularly vulnerable. Small businesses with fewer than 20 employees-comprising nearly 60% of the retail sector-lack the scale to absorb these costs, leading to layoffs and operational closures. The closure of the De Minimis Loophole, which previously allowed duty-free imports on low-cost items, has further exacerbated challenges for e-commerce and perishable goods retailers.

Private Credit as a Lifeline-and a Systemic Risk

As small businesses grapple with tariff-induced financial stress, the private credit market has emerged as a critical alternative to traditional banking. According to , companies have increasingly turned to private credit for loans amid tariff-related uncertainties, with lenders capitalizing on the "yield premium" offered by lower-middle-market (LMM) borrowers. By 2024, the U.S. private credit market had expanded to $2 trillion in assets under management, driven by its ability to provide flexible financing to small retailers and other tariff-exposed sectors.

However, this growth has introduced systemic vulnerabilities. The International Monetary Fund (IMF) has raised alarms about the risks posed by private credit's expansion, particularly in the insurance sector, where insurers have allocated significant assets to illiquid investments like commercial real estate and collateralized loan obligations (CLOs). The rise of "evergreen" private credit vehicles-structured to provide liquidity to retail investors-has further complicated the landscape. These funds, now accessible through 401(k) plans, may force managers to sell illiquid assets at fire-sale prices during redemption surges, destabilizing broader markets.

Systemic Risks and Macroeconomic Volatility

The systemic risks extend beyond private credit. Tariff-related uncertainties have contributed to macroeconomic volatility, with second-order effects such as sustained inflation and reduced consumer spending compounding vulnerabilities in the private credit sector. For instance, the 2025 market volatility highlighted concerns about the opacity and credit quality of private credit investments, as high-profile bankruptcies in the auto lending and auto parts industries triggered wider credit spreads for lower-quality debt.

Moreover, as noted by , banks struggle to maintain healthy net interest margins amid rising default probabilities, while the depreciation of the U.S. dollar and declining stock market performance have further eroded trading revenues. The result is a feedback loop: tariff-driven economic uncertainty raises borrowing costs, which in turn increases the likelihood of defaults, creating a self-reinforcing cycle of financial instability.

Conclusion: A Call for Caution

The Trump-era tariffs have not only strained small businesses but also reshaped the private credit landscape, introducing systemic risks that demand regulatory scrutiny. While private credit offers a vital lifeline for tariff-impacted firms, its rapid growth and structural complexities-particularly in the retail space-pose challenges for both investors and policymakers. As the economy grapples with the long-term effects, including a projected 6% reduction in long-run GDP and a 5% decline in wages, the need for a balanced approach to trade and credit market oversight has never been more urgent.

Investors must weigh the short-term yield advantages of private credit against the broader risks of contagion, liquidity mismatches, and macroeconomic volatility. For regulators, the challenge lies in fostering innovation in credit markets while mitigating the systemic risks that could destabilize the financial system. In this high-stakes environment, prudence-not just for investors but for policymakers-will be the key to navigating the tariff crisis.