With Britain set to officially exit the European Union on the commencement of Brexit – 29th of March, 2019 – business owners are waiting to see how the monumental change will impact lending and other financial services in the UK.
The business funding sector is a particularly important area of interest, as the uncertainty surrounding Brexit could cause lenders to shy away from investments and loan approvals for the sake of risk aversion. On the other hand, some lenders are optimistic and ready to seize any opportunities that may arise in the changing market.
More than 40% of alternative funding providers see opportunity
Brexit has always been steeped in controversy and negative projections, but many lenders aren’t buying into the fear-mongering. In fact, a marketing survey conducted by Allen & Overy showed that 43% of investors feel that Brexit may present additional investment opportunities due to other lenders backing out of the game during a period of uncertainty.
Businesses in the UK will still need funding after Brexit, but many investors will be hesitant to approve loans. Of course, that means that alternative funding providers and online credit brokers will receive more applications than ever as other conventional banks and institutions lower their acceptance rates to mitigate risk.
Entrepreneurs that are starting up may also find business funding to be problematic with Brexit on the horizon. However, websites like iLoans are often able to provide entrepreneurs with personal loans that can keep them covered when cashflow is problematic. The maximum loan value is £5,000 which may provide a vital lifeline to many small business owners. This is a route likely to become increasingly popular to resolve short term cash flow problems as conventional banks tighten their lending criteria and accept less applications.
34% of investors are concerned that Brexit may limit their ability to provide funding
While many brokers and alternative lenders are seeing opportunity, about a third of investors are worried that Brexit may reduce their ability to approve funding. Still, 29% of investors said that Brexit will most likely have no impact on their business whatsoever. Likewise, more than 40% of borrowers stated that Brexit will have no effect on their short-term funding plans.
A fair share of business owners are concerned that Brexit could increase the difficulty of gaining access to funding. In fact, almost 20% of borrowers have temporarily postponed their business funding plans. Overall, surveys suggest that there’s more optimism in the air than unease, but a fair amount of investors and borrowers aren’t even concerned about how Brexit will affect their businesses.
More than 65% of UK borrowers believe that Brexit has hurt their ability to obtain funding
Roughly two thirds of borrowers in the UK are already blaming Brexit for their inability to adequately fund their businesses. Whether or not Britain’s impending withdrawal from the EU is the true cause of their financial woes is another story, but this stat could be an indicator that lenders are already bumping up loan rejection rates.
If borrowers are already having trouble finding funding in a pre-Brexit environment, how will they fare once the full impact on the financial services sector has been realised? Fortunately, many analysts are speculating that the panic leading up to the change will be worse than the actual long-term results of Brexit.
Rising interest rates could cause funding difficulties for SMEs
Prime Minister Theresa May is trying to gain support for a withdrawal deal that would set up an agreement between Britain and the EU to govern post-Brexit relations. However, if the MPs don’t vote to back her deal, then we’ll be seeing a ‘no-deal Brexit’. That simply means that the UK would be exiting abruptly on 29 March 2019 without any deal in place to manage the relationship between Britain and the EU going forward.
The governor of the Bank of England has suggested that a no-deal Brexit could cause a sudden interest rate rise. Obviously, higher interest rates would be bad for many small businesses that are already having funding problems. Since SMEs and micro-businesses are at the bottom of the financial food chain, they would feel the impact of higher interest rates the most.
One third of investors say that Brexit will have no impact on their business
Fortunately, there are still plenty of lenders that will continue to provide funding to businesses during the pre-Brexit build-up. Whether their lack of concern will continue after a no-deal Brexit is yet to be seen. Although Britain has allegedly missed out on £4.5 trillion in economic growth over the past two decades, the UK’s financial sector isn’t all doom and gloom.
Case in point, the alternative finance sector has grown by more than 30% in the past year alone. This shows that banks and larger institutions are stepping back to play a more reserved role while alternative lenders are still mostly optimistic and open to funding small businesses.
Funding woes could give the advantage to freelancers and contractors over salaried employees
An altered job market balance is another interesting effect that Brexit will have on the financial services sector. Many companies that are struggling to fund annual salaries will look to outsource work to freelancers and contractors on a case-by-case basis in order to save on payroll expenses.
As a result, funding difficulties could lead to tighter budgets that call for hiring labour as needed instead of paying salaried employees. While contractors and freelancers could see an uptick in business, altogether this could lead to rising unemployment rates in industries where in-house employees can easily be replaced by on-demand labour.
What about London’s status as Europe’s financial centre?
As of the third quarter of 2018, the financial services sector was bringing in approximately £187 billion, accounting for more than 10% of Britain’s economy. The UK has also histrionically been Europe’s largest financial services market, with London not only known as the financial centre of Europe but also the financial capital of the world.
However, analysts estimate that Brexit could cause London to lose up to 10,000 jobs in the banking sector and 20,000 positions in the financial services sector. Altogether, reports indicate that up to £1.5 trillion worth of assets could be moved out of the UK.
Ultimately, London may still be a larger financial hub in terms of business volume than other cities in geographical Europe, but Brexit will mean that a new city must be named the EU’s financial capital – will it be Frankfurt or Paris?
By JOHN SAUNDERS
Source: London Loves Business