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Background
As readers are no doubt aware the UK voted to leave the EU in June 2016. We were shocked that Brexit actually happened and were worried about the impact on our clients.
The long lasting effects are unknown and much will depend on the negotiation of trade agreements with the EU. Some commentators have suggested that the UK could be in recession for many months whilst others have suggested that this will all blow over and the UK will rapidly recover.
We have attempted to evaluate the worst case scenarios and impact on our small business clients.
We all need to be aware of the potential threats to the UK economy and our clients/customers and take appropriate steps in order to survive and to thrive.
Summary
The Bank Of England is likely to cut interest rates and provide liquidity facilities to banks in order to prevent another credit crisis and to calm the markets. Financial markets could be due to political or financial/economic reasons and its too early to predict what could happen in the future.
However, there is a potential risk of recession due to the fall in exchange rates, inflationary pressure and uncertainties affecting business and consumer confidence. Foreign investment may also fall.
The full impact of Brexit is not yet known and one of the key factors will be the negotiations of a new trade agreement with the EU. If the Norway/Swiss models are followed and UK businesses can access the Single Market for imports/exports and financial passporting then the impact of Brexit may be limited.
However, we have considered the worst case scenarios for our core sectors:
Financial services: In the short term, FCA firms should re-check financial forecasts, risk assessments and capital adequacy requirements. In the medium/long term they will need to consider whether they will need to migrate to the EU or setup a subsidiary to ensure passporting.
Tech startups: In the short term, cash burn and forecasts should be re-assessed as it could potentially become more difficult to raise finance if investors are nervous about the UK economy. In the long term, restrictions on movement of labour could reduce the talent pool and some of the infrastructure and benefits of operating in the UK.
Fintech: Could suffer the same problems as tech startups but could also be affected by lack of passporting or reduced demand from the financial services sector if they are suffering from Brexit.
Import / Export: Amazon sellers could suffer from double layers of taxation and tariffs if they’ll now have to export goods to both the UK and EU separately, depending on how trade agreements are negotiated. Foreign goods could also become more expensive to UK customers, reducing to demand.
Contractors: Economic uncertainty could increase demand for temporary contracts if businesses are adverse to hiring new permanent staff. However, financial services could potentially suffer from job losses and temporary staff could also be affected. EU citizens need to check if they can stay in the UK and may be able to apply for permanent residence.
AIM/ISDX plcs: Equity markets have suffered and existing plcs may find it difficult to raise new capital. If the credit crisis of 2007-08 can be used as a guide then it may be difficult for new firms to list or to reverse in the near future, as many deals collapsed after the credit crisis.
