A shadowy industry is helping small businesses pay tariffs — at a high cost

Source: NPR Business

A barrage of unsolicited offers for quick cash is overwhelming small business owners, a direct consequence of the sudden financial pressures created by international tariffs. For entrepreneurs like Joshua Esnard, the constant pings, texts, and calls from unknown lenders offering high-cost financing have become an unwelcome soundtrack to running a business. These aggressive pitches highlight the rise of a largely unregulated financial sector that provides a critical lifeline to businesses in distress, but one that often comes with perilous terms.

Why it matters: The imposition of global tariffs created an acute, unexpected liquidity crisis for American importers. Goods arriving at U.S. ports were suddenly subject to tens of thousands of dollars in unbudgeted duties, payable immediately. With traditional bank loans often too slow or inaccessible, many businesses turned to a faster, more hazardous alternative: the merchant cash advance (MCA).

The big picture: This industry has a history of targeting vulnerable businesses during times of crisis. It pursued struggling music venues during the pandemic and cash-strapped retailers during the Great Recession. Now, importers facing tariff bills have become the new market for these high-cost financial products that can quickly devolve from a lifeline into a debt trap.

A Founder's Dilemma

The story of Joshua Esnard, founder of The Cut Buddy, exemplifies the predicament. His journey from teenage inventor to a successful entrepreneur backed by a Shark Tank investor underscores that even thriving businesses are not immune to these systemic shocks.

Esnard, the son of academics, invented his first product at 13 to solve a personal problem: achieving a sharp, professional-looking haircut at home. He fashioned a stencil from a plastic folder to guide his clippers, a tool that would later become "The Cut Buddy."

• From Side Gig to Success: Esnard launched sales in 2016, initially to help pay off a car loan. The product went viral after being featured by a popular YouTuber, forcing Esnard to charge $9,000 to his personal credit card to fulfill a rush of orders.
• Shark Tank Seal of Approval: His entrepreneurial drive led him to an appearance on the television show Shark Tank, where he secured a deal with FUBU founder and investor Daymond John.
• The Tariff Shock: Despite his success, Esnard's business, which relies on overseas manufacturing, was directly impacted by the new tariffs. The sudden need for immediate cash to release his inventory from port made him a prime target for the aggressive lending industry.

"I went from crying on TV about being a new dad to crying on a Zoom about high-cost borrowing," Esnard noted, highlighting the extreme emotional and financial stress the situation has created.

Inside the Financial Trap: The Merchant Cash Advance

Often compared to a payday loan for businesses, a merchant cash advance is a quick but costly form of financing. It operates in a gray area of financial regulation, allowing for practices that would be illegal in the consumer lending space.

Technically, an MCA is not a loan. Instead, it is a commercial transaction where a provider purchases a portion of a business's future sales at a discount.

• How it Works: A lender provides a lump sum of cash upfront. In return, the lender automatically deducts a fixed percentage of the business's daily or weekly credit card sales, or a fixed amount directly from its bank account, until the agreed-upon amount is fully repaid.
• The Cost: The speed and convenience come at a steep price. The fees, when calculated as an annual percentage rate (APR), can soar into the triple digits. Because they are not classified as loans, MCAs are not subject to state usury laws that cap interest rates.
• The Players: The MCA market includes a wide spectrum of providers. Major technology and payment platforms like Amazon and PayPal offer their own versions with relatively transparent terms. However, the industry is also populated by predatory actors and "loan sharks" who use aggressive and sometimes deceptive tactics.

The Regulatory Void

The primary danger of the MCA industry lies in its lack of oversight. Because the transactions are structured as "purchases of future receivables" rather than loans, they sidestep most federal and state lending laws.

• No Licensing: Lenders are typically not required to be licensed.
• No Rate Caps: There are no legal limits on the fees they can charge.
• Aggressive Tactics: Rohit Chopra, now Director of the Consumer Financial Protection Bureau, previously investigated the industry and told NPR he found tactics that "would make a mobster blush."

This lack of regulation creates a high-risk environment where desperate business owners can easily become trapped in a cycle of debt, taking on new advances to pay off old ones.

The Bottom Line

For small businesses caught in a cash crunch, the choice is often stark: risk losing their inventory and potentially their entire business, or accept a high-cost cash advance that could create a long-term financial burden. The tariff crisis exposed a critical gap in the financial ecosystem, where traditional lenders are unable to provide the speed and flexibility that small businesses need to navigate unexpected shocks.

What's next: The proliferation of MCAs has attracted growing scrutiny from regulators. States like California and New York have begun implementing disclosure laws that require more transparency in commercial financing, forcing providers to state the equivalent APR of their products. However, a comprehensive federal framework remains absent. For now, small business owners must remain vigilant, weighing the immediate benefits of quick cash against the potentially devastating long-term costs.