Gary Griffiths, Managing Director of Trade Finance, Bibby Financial Services
Brexit has dominated news headlines for months with the UK no closer to agreeing a deal with the EU. What many people don’t realise, however, is that this is just the first stage of a lengthy process. After it formally exits the EU, the UK will need to agree its future trading relationships.
The UK’s trade policy has unsurprisingly been debated throughout Brexit discussions. As an island nation, the UK has prided itself on established and streamlined import and export processes, which allow British businesses to trade in tandem with the EU. After years of development, Brexit threatens to alter these carefully mapped connections. Indeed, three years since discussions began, we’re still no clearer on what to expect from our new trade policy: deal, or no-deal. If there is one thing the negotiations have made clear, it is how heavily SMEs rely on trade, particularly imports, and the threat Brexit represents to them.
Is Importing still important?
When it comes to trade, the focus for governments and economists tends to be on exporting. This makes sense, as exports are linked to foreign currency income and can help governments to raise finances. However, we are surrounded by imported goods, whether we recognise it or not, and many SMEs need these imports to survive. We recently found that over a quarter (28%) of SMEs currently import, a figure that has been gradually increasing since Q2 2018.
SMEs are often called the backbone of the UK economy, and with good reason. The FSB has calculated that SMEs are responsible for providing jobs for 16.3 million people and generating a combined annual turnover of £2 trillion, which is 52% of all private sector turnover. So, when it comes to balance of trade, perhaps we need to rethink the focus on exports, and start thinking about what UK businesses need.
SMEs need clarity and support
Our research last year found that a third of the 1.1 million UK SMEs with EU suppliers would be unable to operate without imports from the Single Market, while three fifths (61%) would see a decline in profits, illustrating the true extent of SME reliance on EU suppliers for survival and business growth. Simply put, barriers to trade with the EU will hurt SMEs, which in turn will hurt the UK economy.
It comes as no surprise then that that SMEs are demanding more from the Government with regards to both clarity and support with trade. Half (50%) of SMEs say they want the Government to ensure tariffs on goods to the EU are avoided, while almost two fifths (38%) want trade deals with new markets. That is, of course, if the UK leaves with a deal.
Barriers to trade
The UK’s SMEs rely on being able to move goods quickly through the border, and a time-lag at the border has the potential to be problematic. Many smaller companies do not have the resources to adequately prepare for the changes such delayed customs procedures would bring. If paperwork is introduced and completed incorrectly, it will hold up the queue and potentially create a huge blockage; slowing down supply chains and negatively impacting business and customer relations.
Even if SMEs have taken the time to register for Transitional Simplified Procedures (TSP), which we recommend they do, the consequences could be damaging. The imported goods SMEs need to operate would likely be delayed, causing revenues to fall and a shortage of goods on shelves for consumers. We’ve seen the headlines warning of shortages in vital supplies. The threat is real and needs to be taken seriously.
What lies ahead?
At BFS, we’re encouraging SMEs to be proactive amid Brexit uncertainty. Whether that is registering for a UK Economic Operator Registration and Identification (EORI) number, supply-chain mapping or renegotiating contracts with suppliers, there are numerous steps that can be taken to adequately prepare.
It is important to build and maintain relationships with your suppliers and talk to them about ways you can manage the uncertainty. One option is to offer to pay for goods in advance which can be achieved with a trade-payments arrangement. Suppliers may also be more open to offering a discount if they are paid up-front, enabling better cashflow management.
Whatever happens, trade deals need to remain a priority for the Government in the weeks and months ahead. Brexit is delayed, for now, but businesses can’t afford to be complacent and now is a good a time as any to prepare for the months ahead.
Read about the key findings from Bibby's Q1 2019 Confidence Tracker here: https://www.bibbyfinancialservices.com/about-us/news-and-insights/news/2019/smes-predict-brexit-recession