There is a very real possibility that Brexit will affect the ability of small and medium sized businesses to get the funding they need. Uncertainty equals risk. A lot of mainstream lenders are risk averse. Add to the risks inherent in Brexit uncertainty the risks inherent in lending to cash strapped small businesses and new start-ups and you a have a business landscape in which it could be difficult to get funding, at least in the short term. SMEs will be forced to look elsewhere for funding, so you could see alternative sources of business finances grow.
According to the Small Business Finance markets report from the British Business Bank, there is evidence that small businesses, due to the current period of uncertainty, are either using external finance to put in place contingency plans or they’re reducing their finance requirements as they delay longer term investment and expansion decisions.
Declining demand for traditional forms of finance is driving an increased awareness and use of alternatives to traditional finance. The report found that an increasing number of smaller businesses – 29%, up from 22% in 2017 – expect the UK leaving the European Union to have a negative effect on their business; a similar proportion (34%) expect it to be more difficult to access finance post-departure.
Some funding sources, in particular those from the EU will vanish, and in the short term at least, there may be no other sources of funding to replace them, although the government has committed to address this issue, making it more difficult for some to get funding.
Brexit can affect your business funding in a number of ways:
- EU funding
- Foreign investment
- Trade costs
- Enterprise Finance Guarantee
- UK Shared Prosperity Fund
- Finance options
EU funding
In the event of a ‘No Deal’ Brexit UK businesses will no longer have access to funding form the European Commission.
The government has said that it will look to establish a UK Shared Prosperity Fund (UKSPF) to replace European Structural and Investment Funds (ESIF) once the UK leaves the EU. ESIFs include the European Regional Development Fund and the European Social Fund. The Government has said that the main objective of the UKSPF would be to tackle inequalities between communities by raising productivity, with a particular focus on deprived areas of the country.
Foreign investment
The UK depends on foreign investment. EU membership improves the UK’s creditworthiness. Brexit has created uncertainty about the future relationship of the UK with the EU which means that foreign investors would require a risk premium due to the UK’s large external current account deficit. This means UK banks paying a higher price for credit which would be passed to SMEs making interest rates higher and therefore more expensive and harder to get.
Trade costs
On leaving the EU UK SMEs will face higher costs for trading in the EU. Higher costs would reduce a business’ profitability and therefore make obtaining finance harder.
Enterprise Finance Guarantee
This is a government-backed solution that can help to mitigate some of the risk created by Brexit uncertainty. Loans to viable businesses that don’t have security for a traditional loan are backed by 75% guarantee from the government. Businesses are 100% liable for the debt so if they default lenders will get a proportion of the loan, however, all directors must stand behind a personal guarantee.
The EFG supports a range of loan products including revolving credit, asset finance and invoice financing facilities.
UK Shared Prosperity Fund
The potential impact of Brexit on small business funding, prompted the UK Government to commit 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 and replacing European funding. SMEs should find it easier to access finance through the UKSPF in future. However, this has yet to materialise.
According to research, the bulk of UK SMEs believe that maintaining frictionless borders is crucial to their business operations. SMEs with growth related plans are scaling back on capital investments, innovations and exports.
Finance options
To run smoothly you need to ensure that your business has a healthy cashflow and enough working capital to cover your operational costs. Brexit disruption could lead to delayed payments and delivery of goods so you should look at short-term funding options such as invoice financing to help you cover your costs in the interim.
Brexit will impact SMEs but just how is still moot, so preparation is key. Check out our funding options by downloading our complete guide for funding SMEs.