The recent tariff announcements are expected to lead to further uncertainty and trigger potential reciprocal actions by countries worldwide. For US-based distressed companies — those defined as experiencing significant financial or other issues that threaten their ability to continue operating — that presents an even greater challenge. Businesses heavily reliant on imports from the European Union, China, Japan, Vietnam, South Korea, and India must navigate a difficult landscape, as both the tariff levels imposed on these nations and the sheer volume of imported products could amplify the impact.
Specifically, tariffs create a three-pronged problem. First, for the many distressed companies that operate in B2B environments, renegotiating pricing agreements could take time they don’t have. Second, with less influence over the market, smaller distressed companies may struggle to pass rising costs onto their customers. And finally, companies with asset-based loans not only face shrinking margins as tariffs increase the cost of goods sold, but also limited liquidity, as lenders may be hesitant to let them borrow against their assets due to financial performance.
Any combination of these three challenges could cause distressed companies to run out of options and lose control of their financial future. We outline the risks they face and provide actionable strategies to safeguard their businesses.
Trade policy challenges facing five core industries
Electronics and electrical equipment: US electronics manufacturers are highly dependent on imports, especially from Asia, for needed components. Imports of semiconductors, for example, totaled $23.3 billion in 2024, according to researcher Tradeimex.
Distressed companies in this space may have a harder time dealing with uncertainty from tariffs than traditional companies will. They could find customers resistant to paying any cost increases, encounter difficulties unwinding a complex supply chain, and experience a working capital strain resulting from delays in receivables as customers react to the tariffs.
Textiles and apparel: The US imported approximately $105 billion in textiles and apparel in 2023, with more than half coming from Asian countries, according to market researcher Fibre2Fashion. The textile and apparel industry is highly dependent on imports from China, Vietnam, and India, for a variety of reasons, including lower labor costs. Tariffs on raw materials and finished apparel could be particularly challenging for distressed companies, as the industry traditionally operates on razor-thin margins.
Distressed companies in the fast fashion and white-label basics segments could face the greatest risk — these segments already run on low margins and have high dependency on offshore labor and materials. Their lack of liquidity leaves them less-equipped to deal with the impacts.
Pharmaceuticals and chemicals: Many US pharmaceutical and chemical companies rely on raw materials, active ingredients, or finished products from the European Union, China, and India. With a lack of alternative products available due to the highly regulated state of the industry, reciprocal tariffs on these nations may raise costs and disrupt supply chains. Distressed companies are especially at risk, as they often lack the capital, credit, and infrastructure to diversify their supply chains.
Machinery and equipment: US manufacturers of machinery and industrial equipment that import key components and raw materials from the EU and the Far East are seeing tariffs costs driving up the cost of parts and materials. Distressed companies in this space will likely lack economies of scale, supplier networks, and the ability to adjust strategy due to the capital-intensive nature of the industry.
An additional difficulty could be adhering to loan covenants centered around financial ratios, since reductions in operations, such as order backlogs, could cause these ratios to decline. Further downstream effects are likely in industries like construction and agriculture, where delays in procuring required equipment could impact project timelines and productivity.
Food and beverage: The US food and beverage industry imports a wide range of products from the EU, including wines, cheeses, and specialty foods. Reciprocal tariffs could make it more expensive for businesses in the US to stock these items, which could lead them to pass the price increases onto customers. Distressed companies often lack pricing power and must absorb cost increases, further eroding already thin margins. These earnings declines could lead to default or bankruptcy due to covenant violations.
Seven strategies to help distressed companies mitigate risk
There are several strategies distressed companies can implement to stave off insolvency, all centered around reducing reliance on foreign imports, diversifying supply chains, and improving operational efficiency.
1. Renegotiate and diversify the supply chain
Distressed companies must prioritize short-term liquidity over long-term strategic investment. Part of that effort includes renegotiating with suppliers to reduce tariff burdens, for example by opting for reduced volume agreements. If possible, they should look to alternative sourcing from countries that are either unaffected by reciprocal tariffs or have a lower tariff rate. For instance, assessing the supply chain for finished goods or components might uncover that China or the EU is importing materials from nations less impacted by reciprocal tariffs, presenting an opportunity for distressed companies to “cut out the middleman” and preserve margin by using suppliers in new countries.
2. Explore domestic manufacturing and nearshoring
Where feasible, distressed companies can consider reshoring or nearshoring manufacturing to reduce dependence on imports. However, due to limited capital most of their moves — using third-party assemblers in tariff-free regions— will be limited. For those able to reshore or nearshore, it is crucial to assess regional labor and the electrical grid, as some regions may not be immediately equipped to support operations. Companies that successfully reposition manufacturing closer to the US can mitigate disruptions and maintain greater control over quality and production timelines.
3. Inventory management strategies
Distressed companies will likely find it beneficial to reduce inventory and free up working capital. Adopting just-in-time inventory management — despite the supply risk — may be the best short-term strategy for preserving cash. This is the opposite of the strategy of non-distressed companies that, may find it more advantageous to build up buffer inventory to protect themselves against future tariff hikes, increasing short-term costs for the sake of long-term stability.
4. Streamline operations and cut nonessential costs
For distressed companies, cutting nonessential costs early may be critical. Streamlining processes, reducing overhead, and eliminating nonessential expenditures may free up cash to offset the cost increases driven by reciprocal tariffs on imported goods.
5. Effective USE of financial instruments
Distressed companies can use simple, low-cost financial instruments such as forward contracts to lock in future prices. They should be aware, though, that while forward contracts can preserve liquidity in the short term, they require sound forecasting of the business’s demand and market dynamics to ensure the company will be able to settle the contract and avoid default.
To mitigate risks from currency fluctuations and uncertainty, distressed companies may hedge across currencies and commodities. Additionally, trade financial instruments such as trade financing and factoring can improve cash flow in the short term via renegotiated payment terms with suppliers and conversion of receivables into cash.
6. Conservation of cash and making fewer action-oriented decisions
In a dynamic geopolitical environment, distressed companies need to maintain liquidity, making decisions with cash conservation in mind. Initiating long-term strategic projects requiring significant capital could weaken their short-term position and hinder their ability to navigate periods of uncertainty.
7. Storage of inventory in free trade zones
Inventory storage in free trade zones allows companies to defer payment of tariffs until the product enters the domestic market — or even avoid them altogether if the product is re-exported — aiding cash flow. Customs processes are also made much less burdensome, allowing for quicker clearance timelines and maintained levels of customer service. The ability to analyze and forecast cash timing amid changes in tariffs is key, as distressed companies risk value loss by drawing cash at the wrong times.
The US administration’s announcement of reciprocal tariffs presents new potential challenges for distressed companies highly dependent on imports from the EU and the Far East. Whether this is a short-term negotiating tactic or a lasting shift in global supply chains remains to be seen. If the latter, market consolidation is likely, and distressed companies must act now to ensure their long-term viability.