Are SMEs banking on Brexit?

With the result of the EU referendum sending a shockwave through the economy and particularly the industry sectors most vulnerable to market uncertainty, such as house building and financial services, how are Britain’s 4.5 million Small and Medium Enterprises (SMEs) feeling?   They are, after all, the backbone of the economy, comprising 99% of all businesses and 60% of private sector jobs.  Whatever happens next, it will be up to SMEs to keep the lights on in Brexit Britain.

There are 4.5million SMEs in Britain

There were several attempts to canvass SME opinion before the referendum – but the results were conflicting.  For example, research published by Close Brothers found that 44% of SME owners and managers were planning to vote remain, 39% would vote leave and 17% were undecided. Another survey, by TNS, found that 38% supported remain, 37% supported leave and 35% were undecided. A third survey, for the Forum of Private Business found that 35% of business owners intended to vote for remain, 55% for leave and 10% were undecided.

To some extent this can be explained by the different definitions of an SME in the various surveys.  For example, whilst TNS polled businesses with up to 250 employee, the FPB’s audience is largely comprised of much smaller businesses. Larger companies, who enjoy greater benefits from access to the single market and freedom of movement will naturally have a greater propensity to remain.

At the same time, there were significant variances across industry sectors. For example, in aerospace and defence, which relies heavily on intra-European collaboration, 69% of SMEs were in favour of remaining, whereas in the haulage category, it was the opposite, with 62% expressing a desire to leave, citing burdensome regulations and unfair competition from foreign hauliers.

SMEs account for 99% of all UK businesses and 60% of private sector jobs

It's important to highlight that there doesn’t appear to be any research on how SMEs actually voted.  All current research is based on opinions before the referendum, rather than actual voting behaviour.

But what is clear is that SMEs were well aware beforehand that a vote to leave would create an uncertain economic climate, at least in the short term, with the potential to set back the progress they have made since the last recession.  Their key concerns included the risk of increased costs, an uncertain regulatory environment, staffing issues, indecisive customers, the loss of EU customers or suppliers, increased tax, and access to finance.

This certainly put the brakes on seeking funding and growth. An FPB survey before the referendum found that only 12% of small firms were planning new capital investment in the next 12 months compared to 32% a year previously. A CEBR survey, which captured before-and-after data, similarly found that 49% of companies were pessimistic about the country’s economic outlook in the week following the vote compared to just 25% beforehand. Businesses’ own expectations of sales, exports and investments were similarly pessimistic, although there is a caveat that the survey was for businesses of all sizes not just SMEs, which skews the results somewhat.

What happens next is to a great extent, up to the banks.  During the last banking crisis their response was to retrench on lending, which hit SMEs very hard.  But their response to the referendum result has been different this time.  For one thing, they have considerably more capital reserves so they can continue to lend.  For another, previous lending restrictions have been reduced, as part of Government measures to boost lending by £150 bn.  An extra £250 bn is likely to be pumped into the economy, through quantitative easing and access to federal reserves to preserve liquidity.

At the same time, banks are keen to stress that they are ‘open to business’ for SMEs.  There has been debate between the Big Four, the challengers and the alternative finance companies as to who is better placed to serve the SME market, which is an encouraging sign that this is a territory in which they wish to continue to compete.  Both Barclays and HSBC have made public commitments to continue to support SMEs.  There is no indication that interest rates will rise or that products will be withdrawn or made more difficult to access, for the time being at least.

Yet analysts are concerned that Brexit will impact the smaller banks more than the larger ones.  The smaller banks have less diversified capital holdings and are more dependent on the UK property market (which is showing signs of stress already). For example, 75% of Shawbrook’s assets (£2.6 billion) are in commercial real estate and SME loans.  Aldermore, similarly has £800 million in commercial property loans and £1.5 billion in asset finance and invoice financing – more than a third of its loan book.  But it is likely that all banks’ capital will come under scrutiny in the coming months, which may make it increasingly difficult for them to keep the promises they are currently making to SMEs.

UK SMEs have secured more than £80million of EU development funding in two years

In the meantime, SMEs are still benefiting from EU funding programmes such as the SME Instrument initiative, which helps SMEs to commercialise their innovations. Thirteen UK companies will get £16.8 million between them to finance pilot projects and another 23 will get £42,000 each for feasibility studies.  UK SMEs have secured more than £80 million of Instrument funding since the launch of the programme two years ago.

In short, for the time being, SMEs have no choice but to take a ‘business as usual’ approach.  They certainly can’t afford to do nothing and it is likely that their plans to hold off on investment will be reawakened once the shock has worn off. They will be aware that keeping calm and carrying on is critical to their success before, during and after Brexit.

The Chancellor has outlined ambitious plans to build a ‘super-competitive’ economy, reducing corporation tax to 15% by 2020 (and it was telling that this was greeted with dismay by several EU member states), and potentially reducing interest rates.  Given the vital role that SMEs play, as employers and contributors to tax revenues, it is unlikely that either the banks or the Government will allow the SME sector to suffer.  Brexit may provide the opportunity and the impetus to invest and to grow and further unlock their entrepreneurial spirit to not only survive but to prosper in this new era.