VIEWPOINT: Small Businesses Uncertainty in the Construction Sector

Small business owners in the construction sector are also working to position themselves in the “K-shaped” economy.  Named for the split recovery Americans experienced coming out of Covid, the K-shaped economy is one in which the wealthiest Americans drive growth in consumer spending, while everyone else suffers under rising inflation, slower wage growth, and higher unemployment.  Well-off Americans with real estate and investment portfolios have continued to prosper as rising home prices and financial markets fueled wealth accumulation, while younger Americans – those saving to buy a home and one-day retire – saw these goals slip further from reach.  The result is a bifurcation of the market, with one set of consumers focused on luxury and the other stretching every dollar.  In this environment, small businesses are struggling to identify their core customer and position their offerings appropriately.

America’s housing shortage continues to worsen as household formation grows faster than new homes can be built.  This means consistent demand for contractors who build approximately 1.5 million new homes each year and are responsible for maintaining nearly 150 million housing units nationwide.  We expect demand for housing to remain high for the foreseeable future as zoning restrictions restrict supply, creating demand for repair and refurbishment of America’s aging housing stock.  However, tariffs on building materials and white goods, coupled with stubbornly high mortgage rates have made contracting services increasingly expensive.  We expect to see continued growth in the high-end of the construction market and in conversions of commercial space to residential space, especially in major cities with housing shortages and high commercial vacancies.

In addition, we expect the construction of data centers, warehouses and modern manufacturing facilities to drive growth in construction this year.  We are also watching for new, less labor intensive and more efficient, forms of housing construction, such as 3-D printed homes, to gain market share.

We expect the K-shaped economy to continue as AI adoption generates a reduction in demand for labor, faster than the economy can create new jobs.  We expect the current tax and tariff structure to largely remain in place, and we expect continued economic stimulus in the form of wide budget deficits.  As a result, we see the economy growing in 2026, driven by efficiency gains, technology investment, and economic stimulus, but expect growth in consumer spending to be subdued as unemployment rises.  Given this dichotomy, small businesses face a difficult balancing act of serving a bifurcated customer base while investing in new technologies and navigating a turbulent economy.

 Factors to Watch This Year:

• Inflation, Employment and Productivity: The Federal Reserve’s interest rate policy balances its desire to maintain a robust economy and full employment with its desire to limit inflation.  Fed cuts do not appear to have stoked a meaningful change in inflation to date, but as tariffs become permanent and the government continues to spend trillions more than it collects in revenue, the threat of inflation remains constant.

One of the greatest weapons against inflation will be productivity growth.   Today business leaders and economic experts seem to be pinning their hopes on new AI technologies to usher in an age of automation and rapid productivity growth.  History has proven that new technologies take years to work their way into business processes, so we do not expect a silver bullet cure for inflationary pressure.  However, we do believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs.  In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the economy evolves.

Unemployment is especially high for younger Americans with less experience, and we see entry level jobs being the first jobs being automated away by AI.   We can only hope that the dynamism of the US economy is able to create new, inspiring roles for those being displaced by automation.

• Tariff Policy and the Political Environment: It seems unlikely that small businesses will see tariff relief any time soon, given the Trump Administration’s aggressive response to the Supreme Court’s decision, in which he promised to maintain or increase tariffs on importers of foreign goods using other sections of the Trade Act of 1974.  The President promised to immediately implement a 15% tariff on all countries using Section 122 of the Act and committed to use Section 301 of the Act to open investigations into the unfair trading practices of other nations, which could result in additional tariffs.  The end result is continued volatility in U.S. trade policy without material relief from tariffs in the short term.

Given the President’s commitment to maintain the use of tariffs as a point of leverage in his negotiations with foreign countries, and his willingness to reach for novel interpretations of existing trade law, it seems unlikely that material tariff relief for small businesses is coming soon.  Section 122 of the Act allows for tariffs of up to 15% to be imposed for up to 150 days in order to correct “fundamental international payment problems.” Section 301 would likely take longer to implement as its required trade investigations take time, but these tariffs would not be restricted to a 150-day time limit, making them more durable and sustaining.  We believe that the President remains as committed to his tariff strategy today as he was when he entered office, and that small businesses are unlikely to see a significant drop in tariff rates during the Trump Administration without an act of Congress that defies the President’s wishes.

Small businesses should be keeping a close eye on changes to tariffs on the specific goods and countries that they import from.  If a drop in tariffs does in fact occur, small businesses should have the capital lined up to finance the purchase of critical inventory at discounted prices.  However, small businesses should also be prepared to continue managing their business without significant tariff relief and should explore opportunities to source more goods domestically.  For small manufacturers, exploring the possibility of vertical integration, or the production of more component parts in house, may prove a valuable advancement of the business model that pays dividends for years 

• Supply chain volatility: Unfortunately, we believe that tariffs introduce greater uncertainty and instability for small businesses.  While it is possible that some tariffs on select goods from select countries could fall in the short term, these reductions are likely to be short-lived and might even rise over time.  It is also possible that the U.S. government could be forced to repay some or all of the approximately $170 billion in tariff revenue paid by U.S. importers over the past year.  However, there are likely to be years of court battles over this issue before any checks are written, leaving small businesses with little potential upside in the near-term.

• Access to capital: Continued volatility in tariff policy makes it difficult for lenders to properly assess the future cashflow of a business that is seeking capital.  As a result, lenders may be forced to lend more conservatively, reducing overall offer size and increasing price to compensate for the increased risk presented by the uncertainty in cost of goods and demand.

• Manufacturing: We believe that the U.S. is in the early stages of a manufacturing resurgence, some of which can be attributed to current U.S. tariff policy.  While tariffs are often a challenge for U.S. manufacturers who import component parts and assemble these parts in the U.S., over time, we expect more and more of these components to be manufactured in the domestically, leading to a growing U.S. manufacturing base.  At Kapitus we have seen strong growth in the number of small manufacturers who have applied for and received capital over the past year and are optimistic that this trend will continue as domestic manufacturers increasingly adopt AI and robotic technologies to make their operations more efficient, and benefit from the impacts of aggressive tariff policies and a weaker dollar to provide protection from foreign goods.

We expect 2026 to be a year of rapid technological advancement that places pressure on small business owners to combat higher costs and lower margins with the adoption of new technology.  Small businesses will also need to keep a laser focus on the needs of their customer base.   Understanding which arm of the K-shaped economy a business is serving will be essential to success.  To navigate changes in government policy, technology, and consumer spending, small businesses will need to be nimble and have access to flexible financing solutions.  This means determining what financing they are likely to need and developing relationships with a variety of financial services providers.  While many community banks have been consolidated into larger regional institutions, and others have scaled back their exposure to commercial credits, there are many non-bank small business lenders that are ready to fill the funding gap.  Despite considerable uncertainty, we expect 2026 to be a prosperous and exciting year for small business owners and look forward to providing growth capital to this community, the most critical growth engine of the American economy.

Ben Johnston is the chief operating officer of Kapitus, which provides growth capital to small businesses and has provided over $8.5 billion to over 50,000 small businesses since 2006.  Kapitus offers multiple loan products to small businesses, including SBA loans, revenue-based finance, equipment finance, cash-flow based factoring, revolving lines of credit and invoice factoring.