The secured lending industry has had to adjust to a series of exogenous shocks over the last two decades: the Great Financial Crisis (GFC), the COVID-19 pandemic and now fast-changing policies around tariffs and trade. The current environment presents a distinct set of challenges and risks— but many lenders appear to be fighting the last war, applying lessons learned during COVID that may prove ill-suited to this new era of uncertainty.

Shifting trade policies call inventory values into question. Tariffs’ impacts on inflation, economic growth, interest rates and corporate finances remain cloudy, in part because it is unclear to what extent companies will pass cost increases on to customers. The question marks swirling around these and other key variables make it difficult to put a precise value on goods or to have faith the values won’t shift dramatically in the coming months.

Given this confusing and dynamic environment, it’s easy to see why a lender may want to wait for the dust to settle before commissioning an appraisal. But this approach could backfire, leaving the lender in the dark as risks compound. Lenders may want to revisit their strategies from the GFC and conduct appraisals more often rather than less. 

Tariffs Sow Confusion About Inventory Values 
The current tariff situation creates a particular set of problems for lenders. Asset values are under pressure, and there’s no way to know if conditions will improve or worsen in the months ahead. Companies have not yet been through a full inventory cycle in the new regime— much of the current inventory was acquired prior to the new tariffs— and new developments could alleviate or exacerbate the situation. In particular, the value of retail inventories may not become clear until the industry gets a full cycle under its belt, which may not happen until after the holiday season.

Changes in supply chains also have implications for inventory valuations. Companies have started reconfiguring supply chains to minimize tariffs’ impact, but it’s too early to fully gauge the ultimate effects of those changes. For example, we have seen situations in which companies move inventory from one geography to another to avoid tariffs, but these changes come with differing logistical capabilities and expense structures and potential quantity concerns. While changes like these affect the value of the inventory in question, quantifying the impact is difficult. 

Tariff uncertainty could create negative downstream impacts as well. Companies have to decide how much to pass along higher costs to customers, potentially reducing demand, and how much to absorb them, hurting margins. Their choices have implications for inventory levels and valuations. Meanwhile, rising trade barriers worldwide could pressure export demand with repercussions for export-reliant channels.

Tariffs may even drive positive outcomes for some companies. For example, increased onshoring could produce new lender opportunities in the United States or across North America. With so many possibilities in play, it is difficult to assess high-level valuation trends with a high degree of confidence.

Lenders’ Response to Tariffs Raises Questions About Risk
Appraisal activity has slowed. We believe lenders are reluctant to act, preferring to take a wait-and-see approach as conditions shake out. On the whole, their overall reaction seems to be “When in doubt, don’t do anything.”

That stance worked well just a few years ago, when the industry collectively kicked the can down the road in the first year of the pandemic. This approach made some sense amid COVID, when the economic trajectory was relatively predictable. Even in the pandemic’s early days, it was fairly clear the economy would suffer a massive decline and then rebound, bolstered by government support. The argument for delaying appraisals then was that values would clearly be depressed in the middle of the pandemic, but they would return to something more like normal a few months down the road.

That template does not map to the current situation. Tariffs are in place and increasing, and future policies seem unlikely to reduce the impact substantially, especially considering the volume of goods purchased prior to new tariffs that remain in companies’ inventories. Anyone anticipating a large initial shock, followed by a powerful rebound, seems likely to be disappointed. 

For a better analogy to the current situation, lenders may want to revisit their responses to the GFC, the last time defaults were a major worry. The future then was hard to grasp, much as it is now. To understand their risk posture as well as possible, lenders during the GFC engaged in appraisals more frequently—in many cases two or even three times a year.

The crisis in 2008 may have forced lenders’ hands, as the economy and commodity prices cratered. By contrast, this year the economy has remained solid and global commodity prices have stayed fairly stable. Nevertheless, the current environment has important implications for collateral values and lending risks. Lenders should be careful not to let the economy’s resilience to this point lull them into complacency.

Risks May Compound Over Time
Lenders applying the COVID approach in the current market likely intend to resume their regular cadence of appraisals after tariff impacts settle into a new normal. But the new normal could take many months or even years to emerge, and risks could compound during that time.

During normal times, lenders face the risk that borrowers’ collateral values will fall and/or their business performance will deteriorate. External shocks can mask these problems. COVID impacts receded fairly quickly, so they had little time to obscure intrinsic factors that could affect risks to lenders. By contrast, tariffs’ impacts are likely to extend far into the future. The longer lenders wait for a new normal, the more time these problems have to compound, potentially multiplying risks. 

Meanwhile, today’s uncertainties heighten the potential for borrower missteps. Borrowers are trying to navigate an exceptionally complex environment. Some of their decisions—about choices related to maintaining margins versus eating higher costs, making changes to their supply chains, and more—may introduce greater risks for lenders. The risks may be especially acute when borrowers are short on availability because the companies could be forced to borrow after conditions deteriorate further. Lenders need to stay abreast of these developments to make good decisions of their own.

More frequent appraisals can help lenders identify their risk exposures sooner rather than later and take appropriate action.

The Cost of Knowing Versus the Cost of Not Knowing
Understanding risk is the essence of lending. Conducting appraisals more frequently can help lenders stay on top of their risks as they navigate this new, complex and highly uncertain environment. Alternatives beyond standalone appraisals, such as appraisals paired with addendums or ongoing advisory services, can provide greater visibility into ongoing trends. These options come at a cost; lenders will need to weigh the cost of the services against the greater insights they offer.

It seems clear the current dislocation will be longer than the effects of COVID, and perhaps much longer. At some point, lenders will need to become more assertive about gauging the risks they face in this complex, fast-shifting landscape. Engaging in more frequent appraisals will come at a cost, but we believe the cost of waiting could be far greater. 

About the Authors:
Alex Sutton is managing director, head of research, for Gordon Brothers’ Valuation division where he coordinates industry guidance and market research to support cross-asset appraisals. Prior to this role, Alex headed Gordon Brothers’ Inventory Valuation practice as well as AccuValLiquiTec’s Inventory Valuation practice, which was acquired by Gordon Brothers in 2015, where his team produced reports used primarily for financing and financial reporting. With over two decades of experience, Alex has directed inventory appraisals across a wide range of industries, including aerospace, agriculture, apparel, chemicals, food processing and wholesaling, building products, beverage, giftware, grains, furniture, healthcare, home furnishings, industrial machinery, lumber, machine tools, medical devices, metals, paper, pharmaceuticals, plastics, retail, seafood, technology, textiles, and transportation.

Becky Goldfarb is managing director, retail valuations at Gordon Brothers. Becky oversees all aspects of retail asset valuations and manages North American operations and business analysis. She has over 20 years of experience in retail and consumer products valuation and disposition.   
    Previously, Becky was the director of analysis for The Ozer Group before Gordon Brothers acquired the appraisal and disposition firm. In that role, she created and maintained financial reporting templates and managed retail and wholesale dispositions and valuation analysis.

Eric Livesey is senior director, global valuations at Gordon Brothers specializing in the valuation of consumer products inventory. He has more than 10 years’ experience valuing inventory across a range of industries, including apparel and accessories, jewelry, food and beverage, furniture and housewares, and consumer electronics and appliances.
     Prior to joining Gordon Brothers, Eric was a valuation director at Hilco Global, where he specialized in retail and wholesale inventory. Previously, he worked as a financial analyst for New York Life Investments, where he analyzed investment revenue and forecast and managed accrued liabilities.