Issues Affecting SMEs as a Result of Brexit

The deadline for Brexit is looming, and we are still no clearer as to what the final outcome will be. The March 2019 deadline is getting nearer, but businesses are still being left in the dark as to the specifics. This is already having a profound impact on the daily running of SMEs in various industries. A recent poll found that 94% of SMEs believe that the government is ignoring their concerns over Brexit. Most of the academic research is being primarily focused on the impact on large corporations, with SMEs being largely ignored. This article will highlight the current issues that the current Brexit situation is causing and how SMEs have to manage while this uncertainty presides over them.

The Role of Tariffs

Many SMEs conduct regular business with EU companies. The EU is a single customs union which means that goods can pass through without the burden of checks or other restrictions. It is also a single market which means the majority of goods are completely tariff-free. They can freely trade with one another without the friction of border checks. The EU as a single entity also negotiates trade deals with other non-EU countries. A Brexit deal without a customs union will see both of these factors disappear. This will have a massive impact on small businesses. Many are having to import large quantities now because they are unsure what will specifically happen to the tariffs and customs process after the Brexit decision has been made. Any decision will greatly impact SMEs because so many of them are reliant upon the EU for trade.

Import and Export Costs

The result of leaving the single customs union will likely mean an increase in import and export costs. Another factor to weigh will be the exchange rate which can dictate the nature of these costs. SMEs who are exporting significant amounts such as manufacturing firms are already seeing the impact of Brexit.

“It’s particularly relevant for some of the SMEs who are exporting, and you can see export orders are increasing. You could argue that the weaker exchange rate is making some of our businesses feel like they need to be more competitive.” (Rain Newton-Smith Chief Economist)

Many SMEs are currently running ‘close to the wire’ and are unprepared for any major currency shocks that could shift currency prices.

Access to Labor

Freedom of movement has been one of the most hotly contested aspects of Brexit. Immigration was one of the key reasons for the eventual outcome of the referendum. There is still no clarity as to the status of current EU nationals in the UK and also what the process for new arrivals from the EU would be. Many SMEs are reliant upon a workforce that consists of EU nationals. Both unskilled and skilled labor is regularly recruited from the EU. The uncertainty of Brexit has led to staffing concerns in SMEs and many of their hiring decisions have been directly impacted by this as they wait for a clear answer for their recruitment concerns post-March 2019.

Grants and Subsidies

Many SMEs are currently reliant upon various grants and subsidies that are provided by the EU. There are various significant funding programmes and at this point it is unknown what the future status of them will be. SMEs have begun to adjust to preparing for business without these grants. However, this has proven difficult since some SMEs were so heavily reliant on these subsidies to run their operations. Banks have begun making plans to offer loans to aid the affected SMEs. Local councils have also begun refocusing on their funding schemes in preparation. Business owners have started to look at their sources of funding and have begun reviewing the entire structure of their organizations.

Affected Industries

Brexit has caused many industries to be directly affected, and the effects have been fairly specific and different depending on the industry.

Manufacturers

Manufacturers are already facing a massive impact from the Brexit decision. Manufacturing accounts for around 10% of the UK’s total GDP. Automobile manufacturing in particular has surged in the past few years; however, recent Brexit uncertainties have curbed this rise. Since the referendum result, SMEs have reduced their export levels to the EU. Some have started to focus more on the British market, whereas others have scaled down their businesses as they await the prospect of a positive trading deal. The entire industry has taken a hit since the referendum and this has been reflected in the output levels in the months of March and April. The April results were particularly disappointing as output levels went to their lowest in more than five years.

Distributors

Distributors are another group who are feeling the pressure from Brexit. Wholesale distributors are an integral SME. “46% of EU businesses that currently source from the UK are seeking to move to new suppliers within the EU, whereas only one-third of UK businesses are searching for UK suppliers over their current EU sources.” (EazyStock) This statistic shows that UK SMEs are still awaiting some confirmation of a deal. Many are holding off on making final decisions until there is a clearer idea of the post-Brexit trading deal. Firms are becoming far more mindful of the inventory management of their supply chains. SMEs, in particular, are becoming far more mindful of their structures and operations in the face of Brexit. The deflated pound has caused some distributors who primarily export to have a net positive effect since the referendum result.

Service Companies

Service companies are feeling the effects of Brexit in a rather different way to the above groups. “The research also found that Brexit-related uncertainty was more likely to affect larger, export-oriented firms and those operating in high-tech and service-related industries.” (BBC) This BBC report highlighted how service-related SMEs are among the most worried about the uncertainty that has come along with Brexit. Those especially concerned were the ones providing high-tech and innovative services.

The Boston Consulting Group completed a survey which led to some interesting findings with regards to Brexit insights on the service industry. “The clear message from our report is that our interviewees, especially small firms with customers or suppliers cross-border, believe that a hard Brexit could impact their business and growth… Both SMEs and large corporations also face potential disruption in the provision of wholesale financial services which in turn will lead to a higher cost of capital for businesses. That is why above all else business would like the status quo preserved.” (Simon Lewis, Chief Executive AFME) Lewis’s quote underlines just how significant a hard Brexit would be for the services industry.  

Accounting/Legal

Accounting and legal firms are crucial industries that are having to adjust with Brexit. SMEs in this industry will usually deal with a fair amount of EU customers. The referendum result has therefore left them unwilling to seek other potential international opportunities. The majority of these firms have preferred to wait and see if there could be a trade deal negotiated. These firms regularly recruit talented EU workers; however, there has been a shortfall in qualified staff since the referendum decision. Accounting and legal SMEs are banking on a Brexit deal that would perhaps favour the services industry and treat goods separately. This had been hinted in the chequers plan that was put forward by Theresa May; however, it was one that was widely ridiculed as being far too unrealistic.

Agriculture

Agriculture is an industry that has been hotly debated by both remainers and brexiteers. This is due to agricultural regulations that are imposed by the EU. Many in the agricultural industry would welcome a Brexit that helps remove the regulatory red tape that has stifled some farming methods. A report done by Hitachi Capital stated that “Confidence levels more than doubled in a year for SMEs in Agriculture (13% Q1 2016 vs. 31% Q1 2017).” However, farmers are split on how they think the future will pan out. While some have seen the EU as far too bureaucratic, others have been reliant upon it for the Common Agricultural Policy. This is a system that offers support according to the acres occupied. The Brexit vote has allowed many farmers to feel optimistic about a future without this red tape, whereas it has left others wary of a future where the Common Agricultural Policy is replaced.

Brexit Decision

It appears that the referendum result is already having significant impacts on SMEs. However, this has been furthered by the way in which negotiations are being played out. It is becoming more apparent that a deal may not be completed until the 11th hour. This would give firms only a few months to prepare, so many are taking a gamble by waiting until then to make any definitive decisions. SMEs have been making contingency plans to prepare for all outcomes. The EU and the UK are both extremely important trading partners for each other, and a close trade deal would be mutually beneficial for businesses on both sides.

Conclusion

Small businesses rightly feel that their concerns aren’t being addressed. Brexit will have a massive influence on them yet they are largely being ignored by the government. The current negotiations show no sign of any real progress, with the latest chequers plan being berated by the EU and many MPs. SMEs will hope for some clarity soon so they can begin to address some of the issues that a soft Brexit will bring or so that they can start preparing for the worst case scenario which is a no-deal WTO-style Brexit. In either case, it is evident that SMEs will be significantly impacted by the UK leaving the European Union and the effects have already started to surface.