Less than a month to go and it’s still very unclear what Brexit will look like – or even if it will really happen on 29th March!
In this climate of great uncertainty how are the UK small and medium-sized businesses coping? Will Brexit be a disruptive force for good or bad? And where will businesses feel its impact most?
Brexit has the potential to fundamentally rewrite the rulebook governing how companies do business in the UK and in Europe. Given the magnitude of the change and the enormous number of treaties and regulations that need to be re-discussed, Brexit clearly has the potential to heighten chaos and uncertainty, which can have damaging consequences for the economy in general.
Prior to the June 2016 referendum, the UK was one of the fastest growing economies in the G7. By the end of 2018, it was the slowest. Although the International Monetary Fund has predicted that the UK will continue to grow at a rate of just above 1.5% in the coming years, its forecast is based on the assumption that the UK leaves the EU in an orderly fashion, with a broad free trade agreement with the EU in place. Sadly, we all know that we are still quite far from this to happen, at least by 29th March!
Finance and Growth
Finance and growth are some of the biggest concerns among people trying to predict the Brexit effects. Affordable, sustainable finance underpins business growth. The Bank of England believes that UK banks are strong enough to survive a disorderly Brexit, nevertheless a period of market turmoil is likely to result in restricted lending to small businesses.
Conscious of the potential impact of Brexit on small business funding, the UK Government has committed to establishing a UK Shared Prosperity Fund (UKSPF). The UKSPF aims to tackle social inequality by raising productivity, particularly in the less economically advanced areas of the country.
Since 1994, the European Investment Fund (EIF) has pooled billions into the economy. This helped in fostering innovation and growth of small and medium-sized business in EU. The EIF does not lend money to small businesses directly but it provides finance through banks. UK companies have received about £2 billion from the EIF so far. Post exit, that source of funding will very likely be lost.
Hard Brexit or Soft Brexit?
A hard Brexit, favoured by some members of the current government, could have an even more significant adverse impact on foreign direct investment (FDI) in the UK.
In a recent research, academics from Sheffield University’s Business School assessed the different possible outcomes of the Brexit negotiations and the potential impact they would have on FDI in the UK.
They looked at four potential scenarios including current models used in Switzerland; the Norwegian model within the European Economic Area (EEA); a Free Trade Agreement (FTA), or the fall-back option of the World Trade Organisation (WTO), which would be the loosest relationship with the EU.
The research concluded that a hard Brexit, the WTO outcome, could lead to 15-20% less FDI into the UK over a 15-year time frame. The negative impact of a softer Brexit, with the EEA outcome, would be in the range of 5-10%, while with a Swiss style or FTA outcome, the negative impact would be in the range of 10-15%.
Brexit could also have a significant impact on innovation. Less economic growth, as a result of a fall in demand for UK goods or a fall in investment in UK goods, could lead to fewer chances for innovation. Moreover, potential innovators in the UK are far less likely to receive the funding that they require meaning that their businesses will remain mere thoughts in the pool of innovative thinking. It’s not a case that the firms that seem most worried by Brexit are growth-oriented innovators, export-oriented and import-oriented businesses focused on high productivity.
Despite this grim picture, we believe that Brexit does present growth opportunities for SMEs. For example, we are seeing a number of small and medium-sized businesses opening offices in some other of the EU 27 countries, making it easier for them to tap new markets and access new talent pools. Brexit (or the fear of Brexit) is also having a positive benefit on certain businesses due to manufacturers stockpiling both raw materials and finished goods.
Three Steps For Brexit Readiness
Compared to larger businesses, small businesses are more adaptable and responsive. Therefore, they are usually better off at times of upheaval such as Brexit. However, smaller businesses also tend to hold smaller contingency funds and they might find it harder to gain access to financing for a cash flow emergency, compared to a larger, more established business.
While managing cash flow is always a need at the heart of small businesses, ensuring cash keeps flowing in 2019 and beyond could require even more attention and a great deal of foresight. If a no-deal Brexit comes about then the likes of customs requirements and additional red tape might stretch the cash flow challenge to its limit.
Here are 3 steps you can implement to prepare your business for Brexit:
- Start the conversation
Speak to staff in your business to ask what they think should be done to prepare their roles or departments for Brexit. Speak to your suppliers or those behind services you use to ask what work they’re doing to prepare for Brexit, and how what they provide to you might change.
You might even speak to your competitors, or trade organisations, to see if they have any advice they might want to share. Don’t think it’s too early to be asking these questions. Negotiations might still be continuing but you have just a few months before Brexit arrives.
- Begin reviewing processes
When speaking to staff you might ask them to document any of their everyday business procedures, if you don’t already have this information.
Flowcharts or step-by-step lists are a simple way to do this, and will illustrate any areas that you might have to review or change in order to meet the new Brexit compliance requirements.
- Embrace the uncertainty
Adventurer and TV presenter Bear Grylls famously says the key to survival is to “improvise, adapt and overcome.” As Brexit approaches, there’s little doubt this is a good advice for businesses. You may need to make fast decisions that are likely to have long-term consequences but, ultimately, there’s no way to prepare other than to ensure you are informed. You must remain adaptable and responsive, and be always looking for opportunities.
In conclusion, small businesses always need to stay ahead of the game utilising their inherent marketplace advantages – this is particularly true and important during periods of turmoil, and Brexit is no exception.
