Cash-starved American companies battered by tariffs use refund claims as loan collateral

(SeaPRwire) –   When the Supreme Court invalidated President Donald Trump’s tariffs two months ago, numerous companies celebrated the prospect of reverting to pre-tariff pricing and the potential for government refunds. However, this ruling has also introduced a significant financial challenge, estimated at $166 billion.

U.S. importers, who bore the primary burden of these tariffs, are now awaiting an estimated $166 billion in refunds for the levies. Yet, many large corporations are facing severe cash shortages, exacerbated by supply chain disruptions stemming from import taxes, increased energy costs due to the Iran war, and consumer apprehension about a potential recession.

“Businesses are struggling,” stated Alex Hennick, president and CEO of A.D. Hennick and Associates, a firm specializing in distressed asset recovery. “The economy is challenging at the moment. Manufacturing costs are rising, customer traffic is declining, and retail sales are down. Consequently, companies in distress may require this money to remain operational.”

“This is a situation where individuals are seeking innovative solutions,” he commented.

Supporting this observation, data from a February KPMG survey revealed that over half of U.S. companies experienced shrinking profit margins. The survey also indicated that 82% reported a decrease in foreign sales, while 61% noted a decline in domestic sales. Furthermore, nearly 70% of firms indicated they postponed significant investments due to the tariffs.

In February, the Supreme Court declared tariffs imposed under the International Emergency Economic Powers Act (IEEPA) unlawful, paving the way for U.S. companies to reclaim payments made during the period the tariffs were active. However, uncertainties remain regarding the timeline for these refunds and the actual amount businesses will receive. The Supreme Court provided no specific details on the refund determination or distribution process, leaving these matters to the Court of International Trade and U.S. Customs and Border Protection (CBP). According to the CBP, once its automated payment system is operational, refunds are expected to be processed within 45 days. The initial phase of this system is scheduled to launch on April 20.

Some companies cannot afford to wait. Instead, businesses in urgent need of cash are leveraging their tariff refund claims as collateral to secure loans.

“If you require cash flow to sustain or expand your business,” Hennick advised, “it is more advantageous to secure it now and strive for success than to wait.”

When Tariff Claims Become Loan Collateral

A recent CBP filing at the end of March indicated that out of over 330,000 U.S. importers affected by tariffs, only 26,664 importers, or approximately 8%, have enrolled in the agency’s automatic refund system. These importers represent $120 billion in tariff revenue, meaning any importer signing up for a refund will only be eligible to claim reimbursement from the remaining portion of the $166 billion in tariff revenue.

Hennick suggested that many large companies most impacted by tariffs, particularly in the manufacturing, automotive, retail, and consumer goods sectors, may find it worthwhile to use their refund claims as loan collateral.

Despite elevated interest rates on loans over the past five years, the immediate availability of cash offers relief to companies still contending with the uncertainty surrounding the exact timing of their refunds. This approach also serves as an alternative to the $100 billion secondary market that has emerged, where companies sell the rights to their refund claims to hedge funds and liquidity specialists. While selling the rights to tariff refund claims may provide companies with a fraction of the eventual refund value upfront and alleviate the stress of refund uncertainty, it means they forgo the opportunity to benefit from the larger refund they would have received by waiting for the rebate process to conclude.

Wes Harrell, a broker and head of a trading group at the capital markets firm Seaport Global, explained that in such situations, the loan-to-value ratio for potential refunds used as collateral might be around 50%, meaning a $10 million refund claim would only secure a $5 million loan. In contrast, companies selling the rights to their refund claims are doing so for approximately a quarter of their projected value.

According to Hennick, the decision companies make on how to utilize their refund claims ultimately depends on their risk tolerance. However, he anticipates that a majority of firms will be compelled to make difficult choices rather than simply waiting for their refunds.

“It’s reaching a point where some individuals may have no alternative,” he stated. “They will either have to sell their claim or borrow money to obtain funds necessary for their business operations.”

The Risks of Increased Borrowing

Harrell, however, points to significant risks associated with borrowing. There is a possibility that the government might issue only a partial refund or reject a business’s claim entirely. Despite CBP’s projections, some supply chain experts believe it could take years for the Trump administration to disburse the rebates, given the immense volume of money involved. If refunds are delayed beyond expectations, the accumulated interest on a loan could exceed the refund amount itself.

“As an importer, you remain fully exposed to the timing of the legal proceedings because you have, in effect, retained your rights to the full refund,” Harrell noted. “You haven’t resolved the issue; you’ve merely financed it.”

As time passes without definitive answers on refunds, Harrell anticipates that more companies will opt for actions such as selling the rights to their claims, preferring to receive funds immediately rather than waiting for a future payout.

“CFOs will prioritize clarity and certainty regarding their capital,” he concluded, “over the uncertainty of a contingent government receivable with no defined timeline.”