Donald Trump's tariffs will see some companies struggle to stay afloat

Many businesses will manage to trade through the current uncertainty and will often try, if they can, to pass the additional tariff costs on to customers and thereby maintain their margins. This is easier in the case of high-price consumer goods such luxury cars, but nearly impossible if selling a commoditised or easily substitutable component that goes in someone else’s product.

If this is not possible, firms could seek out other, more stable markets to sell into as an alternative to the US. After the UK government’s announcement of new trade deals with India and the EU in recent weeks, this could become a more viable proposition.

Companies whose supply chains include suppliers exporting from China could face a double whammy, as very high Chinese tariffs could be levied on those sales on top of tariffs imposed on the retailer from the UK. They might need to find cheaper suppliers to help absorb some of the new costs and may also find it necessary to consider restructuring their workforce or closing underperforming sites.

One of the most important factors in navigating the current trading landscape will be the experience of the management team. Medium-sized businesses with a chief financial officer and management team experienced in turnaround may have the experience, rigour and flexibility to steer their firm through these troubled times. Businesses of this scale are also more likely to have cash reserves to draw on to absorb unexpected cashflow shocks and see them through this uncertain period.

Companies lacking experienced management and/or the benefit of cash reserves may find trading through the uncertainty much more challenging. Alternative financing options may need to be considered to improve liquidity or tough decisions to close or sell may be required.

Another significant factor will be lender support – does the company have a lender that will be willing to renegotiate or restructure its facilities and support the business in the future? Without this, many companies are likely to find themselves in breach of their financial covenants.

Companies will be hoping that their lender will continue be supportive of their long-term prospects and will be willing to waive breaches or renegotiate covenants in the hope that the company’s difficulties are only temporary.

It is possible to navigate your way through something like this without resorting to formal measures and often some quite extreme changes may be required. In some cases, this will involve analysing the business model and taking a view on whether it remains viable or not.

Companies’ first reactions will be to hold on, try to weather the storm and give the situation time to settle, but there is, of course, risk in this approach. As time goes on, companies will need to deal with the repayment of loans reaching maturity and must address going concern statements as their audited accounts become due.

Amy Flavell, Partner and insolvency and restructuring specialist at Pinsent Masons