The Impact of Brexit on UK Small and Medium-Sized Enterprises

The Impact of Brexit on UK SMEs

The decision by the European Union regarding the recent referendum has been analyzed on a macro scale, where most commentators have raised concerns with the type of deal the United Kingdom would expect in recognition with the leaders of the EU (Dupont, et al., 2016, p. 115). The subsequent reactions following the events of the 23rd June 2016 included the pound dropping in value to what was considered as the lowest since 1985 (Elliott & Atkinson, 2017). Majority of the firms in the European Union are planning contingently targeting to limit exposure to match the rapidly changing market even though there are ongoing negotiations on the execution of the Brexit process. Brexit is still unknown, and due to the high levels of uncertainty associated with the process, it is crucial for business and firms consider evaluating their opportunities to anticipate the subsequent results. Therefore, the primary focus of this easy is to examine the various opportunities within the UK small, medium-sized enterprises given the decision by Britain to leave the European Union.

Finance

Majority of the SMEs receive their finances from retail banks, a reason why they not reliant on investment from pension funds or hedge funds. Britain departure from the EU is probably not to have a great effect on the daily running finances of SMEs. However, the wider economy would be massively affected which would affect SMEs. By being a member of the EU, Britain is more creditworthy, implying that business borrowers may be required to pay a higher price for credit upon exit from the EU. Another issue and danger from the exit would be more restrictive financial conditions that would led to less funds and high probability of having higher interest rates in the economy (Anderson, et al., 2016).

Trade and Exports

The Britain’s trade and export system would change following the renegotiations with the European Union. SMEs involved in massive export processes and activities within the European market would experience several uncertainties (Dhingra et al., 2017, p. 651). For instance, exporting would become complicated once the United Kingdom loses access to the customs union. The major impact of the lack of access to customs union would be the complexity in the custom clearance procedures. Moreover, the customs clearance procedures would also become expensive and bureaucratic. Smaller firms trying to thrive in the economy and market need the simplest form of access to the European single market to record positive profit margins. Such advantages are accrued to the fact that EU affiliation has a significant impact on the supply chains and recruitment procedures. Therefore, by exiting, SMEs in Britain would limited access to the European single market, which makes the nature of access unclear (Lannoo, 2016, p. 257).

Opportunities for Trade and Exports

However, there are opportunities in relation to trade and experts in a post-Brexit trading economy. There will be multiple opportunities for new markets that will emerge due to new trade deals with countries like India, Canada and China. A drop in sterling pound is an implication that it will become cheaper for SMEs to expert into European markets.

Changes to Workforce

One of the possible reasons why many people voted for the exit was due to the changes on immigration laws. Many are looking to the government to establish a firm control on immigration during the post-Brexit period (Portes, 2016, p. 13). However, such changes would have a greater impact on the SMEs. There would be a potential brain drain which would affect SMEs for the education, technology and science sectors in this category is vulnerable to their best minds moving to the continent. Businesses relying on EU skilled migrant labor may experience recruitment problems in an event where the immigration laws become more stringent. However, SMEs would have opportunity in this for they would be in a position of recruiting individuals from a wider talent pool. Such would be possible due to the alleviation of bias towards EU citizens when hiring from abroad (Portes, 2016, p. 15).

SMEs in the UK will undoubtedly have the risk of having difficulties in gaining access to new capital due to relegate of the state’s sovereign credit score by top-rated organizations. Britain has been stated to depend on foreign stakeholders because it operates a national current account shortage of about 5% of its GDP. Therefore, by recording a low credit score explains why lenders would demand a risk premium which would result in high-interest rates to SMEs. There would be a less significant integration of the UK and EU’s financial and banking system which has led to many banks shifting their operations out of the UK due to the Brexit (Begg, & Mushövel, 2016). The need to acquire finance from investment finds and continental banks will result in the development and institution of a new set of rules and regulations governing British SMEs. The outcome would be less competition and easy access to funds by SMEs. Conversely, the British government could consider implementing a counteracting measure, through the deregulation of the baking sector. The government could amend the strict rules instituted after the financial crisis of 2008, an action that would reduce the cost of lending. In case nothing is done to address the situation, banks could consider withdrawing further lending or a financial freeze which would have an impact on SMEs.

A significant issue attributed to the referendum and Brexit is economic uncertainty. Greater uncertainty in economic conditions significantly impacts SMEs. It was a similar incidence during the financial crisis when banks got rid of their lending away from SMEs and towards larger businesses. Given that UK SMEs do not rely much on EU funding at the moment, such prospects would change once the EU scales up its financing plans. For instance, the plan by the European Investment Bank to finance SMEs in the UK with £100m would not be possible after Brexit. Therefore, there would be a need for the British Business Bank to seek funds to cover up for such shortfalls.

Britain based its intentions of leaving the EU on the need to regain national sovereignty. Britain wanted to formulate guidelines for the banking industry. Consequently, by exiting the EU, it would be difficult for continental banks and investment funds for arranging for finance to British SME companies. The complexities would be due to the need of the British SMEs requirements to follow different rules and regulations and the use of additional licensing. The result would be reduced funds accessibility for British SMEs.

The loss of single market would be problematic for the SMEs involved in export partnerships and dealings with the EU. The effect on SMEs associated with the lack of right of entry to single market would be less important as it would constitute only 6 percent of SME in the British export. However, EU membership plays a vital role in the supply chains, implying that withdrawal of membership would result in several consequences. Firms in Britain would incur high costs due to increased tariffs which will have a long-term effect on losing their competitive position. To address this problem, the British Prime Minister declared the need to substitute the EU membership with the unrestricted trade agreement. Britain would be able to prevent SMEs from losing their supply chains if the free trade agreement would succeed. However, the probability of the new agreement succeeding is uncertain because the British government appears to be on the lookout for remunerations of being an associate of the single market with no need to observe European Laws. Realization of a comprehensive trade agreement is quite a demanding and challenging task. For instance, it took seven years to establish and formulate the Comprehensive Economic and Trade Agreement (CETA) between EU and Canada. Conversely, EU leaders are optimistic towards making Britain a success even after leaving the EU (Ebell, & Warren, 2016, p. 123). The UK would have an opportunity of making trade deals with non-European countries and not relying on EU’s customs union, an approach that would provide the exporting SMEs involved with non-European Union states better tariffs. Therefore, for the UK even though it will have fewer negotiation abilities as compared to the EU, the country will not rely on the approval from other member states to obtain a deal (Ebell, & Warren, 2016, p. 123).

Conclusion

In summary, there are several opportunities for the SMEs in Britain due to the Brexit. The devaluation of the pound as well as the trade negotiations that would be established between UK and non-EU countries would be beneficial for the British SMEs. One of the prospects for the SMEs resulting from the Brexit referendum is a devaluation of the British pound. A drop in the British currency about the currency of other countries in the world is an implication that products will be cheaper which would attract external investors. For instance, the tourism industry has since then improved due to the increased number of visitors. SMEs actively involved in the exportation of products have recorded increased profit margins due to the Brexit referendum.

References

Anderson, M., Juden, M. and Rogerson, A., 2016. After Brexit: New Opportunities for Global Good in the National Interest. CGD Policy Paper, 89.

Begg, I. and Mushövel, F., 2016. The economic impact of brexit: jobs, growth and the public finances.

Dhingra, S., Huang, H., Ottaviano, G., Paulo Pessoa, J., Sampson, T. and Van Reenen, J., 2017. The costs and benefits of leaving the EU: trade effects. Economic Policy, 32(92), pp.651-705.

Dupont, G., Ojo, M. and Rossi, J., 2016. Corporate Social Responsibility and Financial Development: Promoting Global Economic Development. In Analyzing the Relationship between Corporate Social Responsibility and Foreign Direct Investment (pp. 115-126). IGI Global.

Ebell, M. and Warren, J., 2016. The long-term economic impact of leaving the EU. National Institute Economic Review, 236(1), pp.121-138.

Elliott, L. and Atkinson, D., 2017. Europe Didn’t Work: Why We Left and How to Get the Best from Brexit. Yale University Press.

Lannoo, K., 2016. EU financial market access after Brexit. Intereconomics, 51(5), pp.255-260.

Portes, J., 2016. Immigration after brexit. National Institute Economic Review, 238(1), pp.R13-R21.