In today's global economy, small businesses can increasingly be impacted by international trade policies. Minnesota is not exempt as a border state with Canada and it's three largest import and export markets being Canada, Mexico, and China. Minnesota’s small manufacturers – from precision electronics assemblers to metal fabricators – are feeling the squeeze from today’s tariff environment. Recent trade policies have imposed duties on key materials and components, raising costs and complicating supply chains for industries like machinery, electronics, and metal goods.
At Security Bank & Trust Co., we are focused on being one of Minnesota's best banks for small business. This means staying on top of current events. I was recently out for coffee with a local financial modeling firm and we discuss how we can support businesses managing their business during this more volatile time. This post breaks down the current tariff landscape and its impact on Minnesota’s manufacturing sector, and offers actionable financial modeling strategies to mitigate these challenges. We’ll explore scenario planning for tariff changes, cost-pass-through tactics, alternative sourcing (including reshoring), and how to analyze cash flow impacts. The goal is to provide clear, structured guidance so small business owners can adapt and thrive despite tariff uncertainties.
Several major tariffs are shaping costs for Minnesota manufacturers today. Notably, the U.S. imposes a 25% tariff on imported Canadian steel and 25% on aluminum. These metal tariffs raise the price of raw materials for any business building metal products or machinery. In fact, during the initial rollout, according to an article at the Star Tribune, Minnesota metal fabricators immediately worried about their bottom lines as prices jumped. U.S. steel producers benefit from higher prices, but manufacturers needing to buy steel or aluminum face sudden cost increases they hadn’t budgeted. American companies import roughly 80% of the aluminum they use with over half of it from Canada. The impact of the tariffs will ultimately drive up costs industry-wide in the near term. Even switching to domestic suppliers only helps so much – U.S. metal suppliers often raise their prices to just under the tariff-inflated import price, meaning manufacturers may pay more either way.
Another set of tariffs hitting Minnesota firms are the Section 301 tariffs on Chinese imports, enacted during the 2018–2019 U.S.–China trade disputes. These tariffs (generally 7.5% to 25%) cover a wide range of goods, including electronics components, machinery parts, and other manufacturing inputs. Small manufacturers in electronics and equipment industries are particularly exposed, since many source parts from China. Companies have been grappling with these China tariffs for years – for example, Medina-based Polaris Industries noted it has dealt with tariffs on Chinese goods since the first Trump administration and managed to trim those related costs by “a couple hundred million dollars” through supply chain adjustments since 2018. In practice, Minnesota relies on over $20 billion in imported goods each year – for inputs not produced locally. Tariffs on those imports act like a tax, raising the cost of Minnesota-made products that use foreign materials.
It’s not just China or metals. While the United States-Mexico-Canada Agreement (USMCA) preserves mostly free trade with our neighbors, recent rhetoric has floated tariffs on imports from Mexico or Canada as well. Minnesota’s economy is deeply tied to North American trade, with nearly half of the state’s exports going to Canada and Mexico. If broad tariffs hit those partners, Minnesota manufacturers would be directly in the crossfire. One analysis found that a hypothetical 25% tariff on imports from Mexico (a key source of parts and materials) could raise Minnesota manufacturers’ input costs by about 2.9%, and over 5.8% when accounting for likely Canadian counter-tariffs – a shock that would “undermine the competitiveness” of key industries like motor vehicle parts, agricultural machinery, and precision instruments. In short, tariffs targeting entire countries or broad categories can have outsized ripple effects on Minnesota’s diverse manufacturing sector.
Tariffs affect small manufacturers on multiple fronts. Higher input costs are the most immediate impact. When raw materials like steel, aluminum, or electronic parts carry an extra duty, the unit cost of production rises. The speed to which these tariffs were enacted didn't provide much runway for Minnesota small businesses to change suppliers and plan accordingly with their supply chain. Even if they were able to locate a domestic supplier, there is no guarantee that the price paid would be aligned with the existing cost structure they were prepared to pay. The result is squeezed profit margins for the manufacturer and more likely, increased prices to the end consumer of the product.
Supply chain complexity and disruption are another consequence. Tariffs can force companies to rethink where they get key inputs. Minnesota manufacturers have long global supply chains – it’s common for a product to involve components from China or Mexico assembled into a larger part in Minnesota. Broad tariffs on those source countries make supply managers scramble for alternatives. According to the Minnesota Chamber since 2016, some Minnesota firms have shifted their supplier base away from China in recent years in favor of North American partners. This kind of reorientation can reduce tariff exposure, but it takes time and effort to qualify new suppliers. In the interim, manufacturers might face delays or even shortages of parts.
I have talked to a number of firms that have been struggling over the past several months if they should be buying up inventory of tariffed materials before duties increase, which will only put further short term pressure on supply and prices. All of this adds uncertainty and uncertainty itself carries a cost: firms may postpone investments or stockpile inventory, neither of which is efficient.
Pricing strategy becomes a delicate balancing act under tariffs. Ultimately, someone has to pay for that 10–25% cost uptick. We saw it in previous years with "fuel surcharges" and other fees added to invoices when gas prices surged. The new challenge for small businesses will be to either absorb the cost (accept lower margins) or pass it on to customers through price increases or surcharges. Small businesses with fixed-price contracts are in an even tougher spot – if you agreed on pricing before tariffs, you might be stuck absorbing the new costs. Minnesota companies that export finished goods may also find themselves squeezed as tariffs raised input costs while foreign tariffs simultaneously increase their end prices, making it harder to compete abroad. This one-two punch can really hurt small exporters (for instance, a machinery maker facing higher steel costs at home and tariffs on its equipment in Canada or China).
In summary, tariffs raise operating costs, complicate supply chains, and force difficult decisions on pricing. Small businesses with lower working capital positions and smaller cash balances are the most vulnerable to these pressures. The good news is that with careful planning and strategic adjustments, small businesses can navigate this tariff turbulence. Below we outline concrete financial modeling and planning strategies to manage tariff challenges proactively.
When tariffs are in flux, scenario planning is your best defense. Small manufacturers should model a range of “what if” situations for tariff changes and be ready with a game plan for each. According to CFODive, start with a worst-case scenario: identify all the materials and products you source from countries facing potential tariffs, and calculate the impact if, say, a 25% tariff applied across the board to those inputs. This exercise gives you a dollar figure for your maximum exposure – essentially, how much extra cost you’d eat if tariffs jump to the high end. Next, model a status quo scenario (current tariffs stay the same) and perhaps a best-case (tariffs are reduced or lifted).
A recommendation and practical approach from local CPA firm Abdo that I liked is to draft two versions of your budget: one with today’s cost structure, and one that builds in higher tariffs on key inputs. It's important that your model maintains its flexibility so that you can adjust as new information comes forward. Every week and nearly every day there is news on the changes in international trade. It's extremely important to maintain flexibility throughout your model. For example, you might create a 2024 forecast assuming an extra 10% tariff on electronics components (if you suspect further China tariff hikes) and another assuming no change. Comparing these side by side will highlight how tariffs would affect your profit margins, cost of goods sold, and even pricing needs. As Abdo notes, “no one wants to see their profit margins eaten up by tariff hikes,” so it pays to map out different outcomes in advance. If the tariff-increase scenario shows, say, a 50% drop in net income and trips your loan covenants or is below your acceptable threshold of change, you know you must either cut costs elsewhere or plan a price increase to compensate.
In your scenario models, consider volume and timing as well. If tariffs are announced to start next quarter, what if you accelerate purchases before then? Many companies (even retail giants like Costco) have responded to pending tariffs by pulling forward import purchases – bringing in extra inventory before the tariff hits and storing it for future use. You can model this scenario: it might avoid some tariff cost in the short term but will increase your inventory holding costs and tie up cash (more on cash flow later). Another scenario to model is demand impact: if you raise prices by 10% to offset tariffs, how might that reduce customer orders? Running a sensitivity analysis on price elasticity (if possible) can prepare you for volume drops when prices rise.
For each tariff scenario, outline a basic contingency plan. Example: “If broad tariffs on Mexico occur, adding $200k in costs, we will switch supplier X to a U.S. source and attempt to raise prices 5% on product line Y.” If tariffs don’t end up happening, great – but if they do, you won’t be scrambling last-minute. The key is having a roadmap for both the “tariffs increase” and “tariffs hold or decrease” cases, so you’re not caught off guard either way. This kind of scenario planning, while time-consuming, can be the difference between a panicked reaction and a measured, strategic response if a new tariff hits.
When tariffs drive up your costs, a critical question is how much of that cost you can pass through to customers versus absorb yourself. Small manufacturers should carefully evaluate contracts and pricing strategy in light of tariffs:
Review your sales contracts and pricing terms. Do you have long-term or fixed-price contracts with customers? If so, you may not be able to add a tariff surcharge or raise prices immediately, meaning you’ll bear the cost until the contract renews. In upcoming negotiations, consider adding clauses that address tariff-related cost changes. For instance, a contract could allow a price adjustment or surcharge if import duties rise by a certain amount. Many customers understand that tariffs are outside suppliers’ control, so don’t be afraid to discuss sharing that risk.
Communicate and educate your customers. If you need to raise prices due to tariffs, be transparent about why. Show the math if appropriate – e.g. “our key component now has a 25% import tax, which adds 8% to our product cost.” Customers are more likely to accept a price increase (or a temporary surcharge) if they know it’s driven by government policy affecting everyone, not just an arbitrary hike. Some manufacturers add a separate line item for “Tariff Surcharge” on invoices during the period of higher costs, then remove it if tariffs are lifted. This makes it clear the increase is external and hopefully temporary.
Negotiate with your own vendors and suppliers. Just as you talk to your customers, talk to your suppliers about tariffs. Are they facing tariffs on their raw materials that they plan to pass on to you? A good relationship with your vendors is just as good as a strong relationship with your customers in times like these. Open communication allows you more foresight into what actions you will need to take. Also, find out if your vendors have tariff exclusion or refund options (some tariffs have exemption processes, or the vendor might be using duty drawback when they re-export items). If a supplier’s costs are actually getting mitigated but they’re charging you full tariff cost, that’s worth a conversation.
Shift the import burden if possible. One creative contract approach, shared by the Wisconsin Law Journal, is to change who technically imports a product. For example, if you sell a machine to a client in Canada, normally you might handle the export paperwork and import it into Canada for them – but with tariffs and uncertainty, you could require the customer to be the importer of record, making them responsible for any duties. This might only work in certain cases, but it’s a way to avoid being stuck with the bill. Similarly, if you’re buying a component from a foreign supplier, ensure the price terms clarify who pays any tariffs. You might negotiate a split of the cost or ask if they can ship from an alternate location not subject to the tariff (if they have multiple facilities).
The goal with pricing and contracts is to reallocate the tariff costs smartly. In practice, this could mean adding indexation in your pricing (tied to tariff levels), passing through surcharges, or adjusting Incoterms (international shipping terms) so the buyer covers the import duty. Small businesses may feel they lack leverage, but remember that many competitors are in the same boat – if tariffs are widespread, it’s understood that prices will adjust in the whole market. The key is to handle it professionally: know your numbers (how much tariffs add to unit cost), be upfront with partners, and update contracts so everyone is clear on who will pay if tariffs change in the future.
Tariffs often prompt the search for alternative sourcing – finding suppliers or production options that bypass the tariff. Minnesota companies have already been shifting supply chains in response to prior trade tensions as mentioned earlier, and even big retailers like Target have cut their reliance on Chinese imports by half in favor of more U.S.-made goods in recent years. Smaller Minnesota manufacturers should likewise explore how they can diversify their supply base:
Source from countries not subject to tariffs. If a particular component from China has a 25% tariff, can you find a supplier in Vietnam, India, or elsewhere that provides a similar part? Many companies have pivoted to suppliers in alternative countries when tariffs made China too expensive. Keep in mind, quality and reliability are paramount – thoroughly vet any new supplier. But building relationships in multiple countries creates flexibility. By not putting all your eggs in one country’s basket, a sudden tariff on one country won’t cripple your whole supply chain.
Consider reshoring critical inputs. Tariffs are often intended to encourage U.S. companies to use domestic suppliers. In some cases, it may make sense to bring production of certain components back to the U.S. or develop local sources. This could involve partnering with another domestic manufacturer or investing in new equipment to make a part in-house. The benefits are avoiding import tariffs and possibly shorter lead times. However, reshoring isn’t a quick fix – establishing new domestic production won’t happen overnight and can require significant up-front investment. Do the math: if tariffs look permanent and add (for example) $50,000 per year to your costs, could investing in a $100,000 machine to produce the part domestically pay off in two years? These are the kinds of calculations to include in your financial modeling.
Maintain multiple suppliers and build inventory buffers. To protect against tariff volatility, it can help to have at least two sources for important materials: perhaps one foreign and one domestic. Even if the domestic option is slightly pricier, it provides insurance. You could split your orders (e.g. 70% from the low-cost foreign supplier, 30% from the backup domestic supplier) so that you preserve the relationship and ability to ramp up locally if needed. Also consider keeping a safety stock of critical imported parts in case a tariff or trade barrier suddenly disrupts incoming supply. Admittedly, holding extra inventory ties up cash, but it might be worthwhile for high-risk items. During the trade war, some businesses that anticipated tariffs bought extra stock in advance and warehoused it, essentially pre-paying to avoid a worse premium later. This strategy should be evaluated in your cash flow planning (discussed next) to ensure you can afford the inventory build.
While exploring new sourcing, be aware of practical limits. Some specialized materials or components simply aren’t produced in the U.S. anymore, or only by a couple of overseas firms. One Minnesota manufacturing CEO noted that if you have “200 components going into a product, you might have two or three that you’d really have a hard time sourcing domestically, like ball bearings.” startribune.com
In such cases, tariffs are an unavoidable added cost in the short term. Still, knowing which inputs fall into that category will help you focus your mitigation efforts (maybe you negotiate harder on those prices or seek a tariff exclusion from the government if available). The bottom line is to increase your supply chain resilience. Companies that diversified their supplier base were better able to weather tariff hits than those solely reliant on one country. Even if shifting suppliers raises unit costs slightly, it can save you from a 25% hike all at once due to a tariff. Model out scenarios: what is the total cost difference if you source component X from a tariff-free country at a higher base price, versus from China with a 25% duty? Often, the difference narrows significantly or even favors the alternate source when the tariff is factored in.
Tariffs don’t just show up in the income statement; they also affect your cash flow and working capital. Small manufacturers need to anticipate how tariff-driven cost changes will flow through their cash cycle and ensure they have the liquidity to manage it. Here are key considerations for cash flow modeling under tariff scenarios:
Incorporate tariff scenarios into your cash flow projections. Just as you created multiple budget scenarios, do the same for cash flow forecasts. For example, create a monthly cash flow projection assuming tariffs add 10-15% to your cost of goods. This will show where cash might get tight. Perhaps paying an extra $50,000 for inventory in Q2 (due to tariffs) means you’d dip into the red by Q3 without additional financing. Identifying that in advance lets you arrange a line of credit or speed up receivables to cover the gap. The goal is to avoid surprises – a detailed forecast can reveal, for instance, that you’ll need an extra week of working capital on hand if tariffs slow down your inventory turnover.
Watch the timing of cash flows. Tariffs can alter when cash leaves your business. If you decide to stockpile inventory before a tariff hits (buying three months’ worth of supplies now instead of one month at a time), you’ll have a big cash outflow upfront and higher carrying costs. Your cash flow model should reflect that lump outlay and the gradual recovery as you sell through that inventory. Alternatively, if tariffs cause shipping delays (e.g. customs holds goods longer), you might end up paying your supplier earlier (to secure supply) but only getting the goods to sell later – widening the cash conversion cycle. Map these timing effects in a timeline to see if you need financing to bridge the gaps.
Secure liquidity buffers. After running scenarios, you might conclude that under a high-tariff scenario, your company could face a cash shortfall. Plan for this by securing additional liquidity before it becomes urgent. Options include increasing your credit line, keeping more cash reserves, or using financing tools like inventory financing or invoice factoring if appropriate. The idea is to have a cushion so that if your costs spike or you need to buy a lot of material in advance, you won’t jeopardize your solvency. Remember, tariffs can come with little warning and the last thing you want is to be caught without cash to pay for a critical shipment stuck at port with duties owed.
Work with suppliers and customers on payment terms. Mitigating cash flow impacts can be a team effort. If tariffs are squeezing you, see if you can negotiate extended payment terms with suppliers to delay cash outflows. Conversely, you might ask customers (especially larger ones) if they can handle shorter payment terms or partial upfront payments on orders to help your cash flow. For instance, if you usually get paid 30 days after delivery, maybe a customer can do 15 days or pay a deposit. Not all will agree, but if you explain that it helps navigate an external cost pressure, some partners may be understanding. Every day of cash flow cycle improvement helps.
Consider pricing and cost adjustments for cash flow, not just profit. Sometimes a small price surcharge to customers can be explicitly temporary to cover cash flow strain. For example, a “tariff and freight surcharge” of 5% that you intend to roll back later could generate extra cash inflow now to cover higher import costs. Similarly, if certain product lines become unprofitable with tariffs, you might decide to discontinue or pause those to conserve cash, focusing on your more cash-generative products until the situation improves.
It’s important to recognize that tariffs can be a long-term issue, not a one-month blip. Many businesses initially wondered if the tariff hikes were temporary; now it appears they can persist for years. So, build a financially resilient operation. That means running regular what-if analyses on both profits and cash flows, and maintaining agility in your financial plan. If your modeling shows that a 10% tariff increase would push your cash flow into dangerous territory, treat that as a red flag to take action now – whether that’s cutting other costs, raising prices, or securing financing. By crunching the numbers ahead of time, you’ll know exactly which levers to pull to keep the lights on and the business healthy under various tariff conditions.
Tariffs and trade policies will likely continue to ebb and flow, influenced by global politics and negotiations. For Minnesota’s small manufacturers, the best strategy is to control what you can: plan ahead, stay agile, and make strategic adjustments to your supply chain and pricing. We’ve seen that broad tariffs can create significant headwinds – raising input costs, disrupting supply lines, and pressuring margins. However, by employing the tactics outlined – from robust scenario planning and proactive pricing strategies to diversifying suppliers and safeguarding cash flow – small businesses can not only withstand the challenges but sometimes even find opportunities (for instance, capturing market share if competitors falter).
In practical terms, a small manufacturer in Minnesota should leave no stone unturned. Map your supply chain and know your exposure. Model the financial impact of different tariff scenarios on your income and cash, so you’re never caught by surprise. Engage your customers and suppliers in solving the problem together – many are in the same boat and open communication can lead to shared solutions. And importantly, keep an eye on trade developments (news and industry updates) so you can react quickly to changes. As the Minnesota Chamber of Commerce notes, broad tariffs can be harmful and uncertainty itself adds cost. The more you can reduce uncertainty within your own business through careful planning, the better positioned you’ll be.
Lastly, remember that challenging times often spur innovation. Some manufacturers have used the tariff tumult to rethink processes, find efficiencies, and build closer relationships with local partners. By taking a proactive, financially savvy approach, Minnesota’s small manufacturers can navigate the tariff turbulence and emerge more resilient. Use the tools of financial modeling and strategic planning as your compass, and you’ll be ready to adapt no matter what the next trade policy change brings. With preparation and agility, even tariffs can be managed on your terms.
Key Takeaways for Small Manufacturers:
By following the above guidance, Minnesota’s small manufacturers can better navigate the uncertain waters of tariffs and trade. The road may be bumpy, but with preparation and prudent financial strategy, even a small shop can steer through and keep growing despite the headwinds. Here’s to robust manufacturing and resilient businesses across Minnesota!
If you are looking for a Minnesota business bank with personalized assistance for your Minnesota manufacturing business, contact Security Bank & Trust Co.’s experienced lenders today. We are experts in lending to Minnesota businesses.