After years of negotiations, the government appears no closer to passing a Brexit deal than it was when the votes were counted. With just a few months left to go, and the UK’s only potential deal looking dead in the water, it’s becoming increasingly likely that UK businesses will be forced to default to World Trade Organisation guidelines on March 29 when working with their EU partners.
As the deadline approaches, businesses and investors are becoming increasingly uncertain, giving us a picture of the economic toll to come. Many business owners are beginning to wind down investments in their businesses, but certain financing tools might offer an opportunity instead. Rather than displaying caution, now may be the ideal time to build closer ties with EU partners.
A no-deal Brexit will have major consequences
While there’s no reason that businesses can’t or won’t be successful after Brexit, leaving the EU without a deal will have serious consequences for many British businesses. In their Q3 SME Confidence Tracker, financial services firm Bibby has compiled data that paints a worrying picture. While SME confidence has dropped only slightly, business owners are preparing for potentially difficult time ahead.
UK businesses need EU imports
A full third of UK businesses surveyed indicated that they would not be able to operate without imports from the EU. Nearly two thirds indicated that their profits would decline significantly. While a no-deal Brexit would not halt imports, it would, in many cases, result in prohibitive tariffs that could make them impractically expensive. Of those surveyed, 55 per cent claimed they would have difficulty finding a new non-EU supplier. With over 60 per cent of businesses affected directly, even those businesses who expect no impact are likely to suffer indirect consequences through their suppliers or clients.
Increasing interest rates
Even in an ideal situation, UK businesses will soon be operating in a much higher interest environment. While the Bank of England has indicated that interest rate normalisation would lead to an eventual 1.5 per cent by 2021, its forecast for a worst-case no-deal Brexit modelled an interest rate as high as 4 per cent. Even a modest increase would force a significant portion of UK businesses to cut costs and repay debts in preparation, while seriously impacting their ability to take out further loans to finance growth. Worse yet, an inability to access financing in the coming years will make it more difficult for these same businesses to manage cash flow issues resulting from Brexit.
Business investment taking a wait and see approach
In light of this news, it’s not surprising that business owners are looking to the future with a wary eye. According to Bibby’s figures, British SMEs planned to invest just £71,525 in themselves in Q4 2018, a steep 45 per cent decrease compared to Q1 2018. As the deadline approaches, it’s likely that businesses will increasingly opt to sit tight, holding on to their money until they know more about what Brexit will bring, and what investments will still be viable after March.
While this is certainly prudent on an individual basis, the immediate effect on the economy will be an anticipatory slowdown. By decreasing their investments, they limit their near-term growth, likely delivering a blow to the entire country’s growth during this time. While this behaviour is clearly situational, it does confirm that businesses are largely opting to take a cautious approach in dealing with the coming changes.
Being proactive could make a big difference
While sitting on their growth capital might seem like a good idea to many business owners, there are things that business owners could be doing to strengthen their position in the event of a no-deal Brexit. Specifically, now is an ideal time to build closer relationships with individual EU business partners using the financing options available to them. In prioritising these relationships, UK businesses may be able to give themselves a competitive advantage in the future
EU businesses want to continue working with the UK, but are likely also concerned about the stability of their ongoing relationships. By using financing tools like trade finance and supply chain finance today, British businesses can demonstrate how their payments will continue to arrive on time, or even early. This reliability in turn, might be leveraged to get access to reduced pricing, which could help to offset the cost of new tariffs. Where businesses who simply waited to see what might happen will be left wringing their hands, more proactive entrepreneurs may find themselves enjoying a major competitive advantage during an otherwise difficult time.