The following is an opinion piece written by Ben Johnston, Chief Operating Officer of Kapitus
Small business owners in the construction industry are being hit by a volatile tariff strategy, a crackdown on illegal immigration and little change in affordability issues that concern consumers. The net result has been anxiety for consumers who feel they are being left behind and for homebuilders and contractors who rely on consumer spending (home purchases and improvements) to generate revenue.
Small business owners in the construction industry are also working to position themselves in the “K-shaped” economy. Named for the divided recovery that Americans experienced in the wake of Covid, the K-shaped economy is one in which the wealthiest Americans drive consumer spending growth, while everyone else suffers from rising inflation, slower wage growth and higher unemployment. Affluent Americans with real estate and investment portfolios have continued to thrive as rising home prices and financial markets fueled wealth accumulation, while younger Americans, those saving for a home and retirement one day, have seen those goals fade. 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 find it difficult 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 a constant demand for contractors who build approximately 1.5 million new homes each year and are responsible for maintaining nearly 150 million homes across the country. We expect housing demand to remain high for the foreseeable future as zoning restrictions restrict supply, creating demand to repair and rehabilitate America’s aging housing stock. However, tariffs on building materials and household appliances, along 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 commercial to residential conversions, particularly in major cities with housing shortages and high commercial vacancies.
In addition, we expect the construction of modern data centers, warehouses and manufacturing facilities to drive construction growth this year. We are also looking at new, less labor-intensive and more efficient forms of home construction, such as 3D-printed homes, to gain market share.
We expect the K-shaped economy to continue as the adoption of AI creates a reduction in labor demand, faster than the economy can create new jobs. We expect the current tax and tariff structure to remain largely in place, and we expect continued economic stimulus in the form of large budget deficits. As a result, we see the economy growing in 2026, driven by efficiency gains, technology investment and economic stimulus, but we expect consumer spending growth to moderate as unemployment rises. Given this dichotomy, small businesses face a difficult balance of serving a bifurcated customer base while investing in new technology 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. The Fed’s cuts do not appear to have led to a significant change in inflation so far, 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 best 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 era of automation and rapid productivity growth. History has shown that new technologies take years to enter business processes, so we are not expecting a bullet cure for inflationary pressure. However, we believe in the power of new AI technologies to streamline work and eliminate both blue-collar 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 we expect 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 automated by AI. We can only hope that the dynamism of the American economy is able to create inspiring new roles for those displaced by automation.
- Tariff policy and political environment: It seems unlikely that small businesses will see any relief from the tariffs anytime soon, given the Trump Administration’s aggressive response to the Supreme Court decision, in which it pledged to maintain or raise tariffs on importers of foreign goods using other sections of the Trade Act of 1974. The president pledged to immediately implement a 15 percent tariff on all countries using the Section 1230 Act and commit to using Article 1232. open investigations into unfair trade practices of other nations, which could result in additional tariffs. The end result is continued volatility in US trade policy without material tariff relief in the near term.
Given the president’s commitment to maintaining the use of tariffs as leverage in his negotiations with foreign countries, and his willingness to push for new interpretations of existing trade law, it seems unlikely that material tariff reduction for small businesses will come soon. Section 122 of the Act allows fees of up to 15% to be imposed for up to 150 days to correct “fundamental international payment problems”. Section 301 would likely take longer to implement, as the necessary trade investigations take time, but these tariffs would not be limited to a 150-day limit, making them more durable and sustainable. We believe 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 tariffs during the Trump administration without an act of Congress challenging the President’s wishes.
Small businesses should keep a close eye on changes in tariffs for the specific products and countries they import from. If rates do indeed fall, 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 running their business without a significant tariff reduction and should explore opportunities to source more goods domestically. For small manufacturers, exploring the possibility of vertical integration, or producing more components in-house, can be a valuable business model advance that pays dividends for years.
- Supply Chain Volatility: Unfortunately, we believe the tariffs introduce greater uncertainty and instability for small businesses. While it is possible that some tariffs on selected goods from selected countries may drop in the short term, these reductions are likely to be short-lived and could even increase over time. The US government may also be forced to refund some or all of the roughly $170 billion in tariff revenue paid by US 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 short-term upside potential.
- Access to capital: The continued volatility of rate policy makes it difficult for lenders to properly assess the future cash flow of a company seeking capital. As a result, lenders may be forced to lend more conservatively, reducing the overall size of the supply and raising the price to compensate for the increased risk presented by uncertainty in the cost of goods and demand.
- Manufacturing: We believe the US is in the early stages of a manufacturing resurgence, some of which can be attributed to current US tariff policy. While tariffs are often a challenge for U.S. manufacturers who import component parts and assemble those parts in the U.S., over time, we expect more and more of these components to be manufactured domestically, leading to a growing U.S. manufacturing base. At Kapitus, we have seen strong growth in the number of small manufacturers applying for and receiving capital over the past year and we are optimistic that this trend will continue as domestic manufacturers increasingly adopt AI and robotics technologies to make their operations more efficient and benefit from the impacts of aggressive tariff policies and a weaker dollar to protect foreign products.
We expect 2026 to be a year of rapid technological advancement that puts pressure on small business owners to combat higher costs and lower margins by adopting new technologies. Small businesses will also need to maintain a laser focus on the needs of their customer base. Understanding which arm of the K-shaped economy a company 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 various financial service providers. While many community banks have consolidated into larger regional institutions, and others have reduced their exposure to commercial credit, 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 we look forward to bringing growth capital to this community, the most critical engine of growth in the American economy.
Ben Johnston is the Chief Operating Officer of Kapitus, which provides growth capital to small businesses and has provided more than $8.5 billion to more than 50,000 small businesses since 2006. Kapitus offers a variety of small business loan products, including SBA loans, income-based financing, equipment financing, cash flow factoring, revolving lines of credit and billing.
