Are businesses nimble enough to survive whatever version of Brexit is coming their way?

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By Richard Carter

01 Apr 2019

by Richard Carter, CEO for Europe and Asia, Bibby Financial Services

As Brexit draws nearer, businesses are asking more questions and demanding more answers. It’s of course unsurprising; after three years on a carousel of constant negotiations, we are none the wiser as to what Brexit looks like. The result? We could we end up with a hard, soft, deal or no-deal Brexit, and if it is the latter, we have no parachute. 

While the EU has provided clear parameters and guidelines at each stage of the negotiation process, there has been a significant lack of transparency at the top echelons of the UK Government. Unable to provide clarity on its desires with any level of certainty or direction, the framework needed to support Britain’s exit has been woefully lacking and as a result, British based small and medium-sized enterprises (SMEs) have been unsure about how to prepare. 

In fact, our research with the British Chambers of Commerce (BCC) conducted found that six months ago 62 per cent of UK firms had not completed a Brexit risk assessment. While this is unsurprising, this does not mean they shouldn’t prepare, or haven’t since. As Brexit uncertainty continues, there are still steps SMEs can take; be it supply-chain mapping to assess possible tariffs, or, for importers, registering for "Transitional Simplified Procedures" (TSP), to defer making customs declarations and paying duty in the event of a no-deal.

Concerns are shared by our EU trading partners

Amongst all this uncertainty however, one thing is clear; how heavily SMEs rely on trade. Our SME Confidence Tracker in Q3 2018 found that a third of the 1.1 million UK SMEs with EU suppliers would be unable to operate without imports from the bloc, while three-fifths (61 per cent) would see a decline in profits. 

Concern is not confined to the UK either, it has spread to SMEs in countries that will remain in the EU too. Our research with the BCC in the Czech Republic found more than a quarter (28 per cent) of Czech firms have seen a decrease in orders or revenue, which they blame on Brexit. Meanwhile, one in five (20 per cent) of SMEs in Ireland stated the UK’s exit from the EU was the biggest challenge their business was facing in Q3 2018.

However, it is my belief that while SMEs trading into or from the UK need clarity, nothing will change on in the days that follow our official exit, or indeed during the six months that immediately follow. While there is no denying there will be a negative economic impact, the initial impact in 2019 will be minimal, assuming we have a deal. 

The pain will instead be delayed, kicking in during the years following Brexit. SMEs are more likely to suffer a death from a thousand cuts, than one large Brexit blow – a series of small hits and knocks in confidence over a longer course of time, that might even go unnoticed until the very last strike. 

For example, in February, Honda announced the planned closure of one of its UK plants, with Brexit cited as a contributing factor. However, the car manufacturer will not actually shut its factory until 2022. Therefore, nothing happens tomorrow, or the next day, or the day after that. But fast-forward three years and 3,500 jobs will be lost, productivity will decline, and the SME supply chain will slowly decay, all with knock on effects across the entire country. 

One thing that I am almost sure of is that Brexit won’t kick-start a repeat of 2008.  Unless we see a hard exit with a no-deal – which would be catastrophic for business and something I view as unlikely – we will not be falling off a cliff edge, stumbling blindly into the financial crisis abyss.  

The difference being that while businesses might not get the details needed to fully prepare, they have known for three years that change is on the horizon. As long as we gain further clarity from the Government in the coming weeks, businesses can begin to make practical plans for the longer term. Whether it is speaking to a finance provider early to discuss any necessary funding requirements, having conversations with the company that moves your goods, or preparing for the worst and registering for a "UK EORI" number to continue trading if the UK leaves the EU with no-deal. These were not luxuries afforded to business owners in 2008.

SMEs will need to reassess their models and supply chains

So, the question that remains is: are businesses nimble enough to survive whatever version of Brexit is coming their way, particularly SMEs? 

While we might not know what a post-Brexit world looks like, or the full implications, what we can see is that entire sectors are re-adjusting their operations. SMEs will inevitably need to react to this and similarly reassess their models and supply chains. Whether it is entering new markets, building relationships with new suppliers or getting a taste for new industries.

Re-adjustments do not stop there and will also have a knock-on effect on funders too, from banks to independent invoice financers like BFS, who will also need to respond. We anticipate there will be an increase in the number of SMEs taking their business international, entering new and unchartered markets to accommodate for these longer-term impacts, and we will need to support them.

This will be no easy feat, especially with UK SME confidence declining by 6.7 points in 2018, from 64.7 in Q1 to 58 in Q4. SMEs will therefore need to collaborate with banks and other funders to summon the confidence they need to manoeuvre overseas in a new risk environment with new trade partnerships. 

In Europe, SMEs will also need to seek support to understand how they can best continue to trade with the UK in a way that is not going to be too costly. While the UK has signalled that it wants to remain open for business, there will undoubtedly be a period of adjustment after Brexit that European SMEs will need to anticipate and plan for. 

But, ultimately, while we can continue to make predictions and paint a picture of what we think the EU market might look after Brexit – this is educated guesswork. We still do not know the terms in which we’ll be exiting the EU and even with a no-deal looking unlikely, there remain a variety of different scenarios that could play out here, all impacting businesses in different ways. So as we try our best to prepare for a future that is unknown and inevitably going to hurt, collaboration will be key. 

 

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