9th June 2016

What does Brexit mean for small businesses?

As R-Day looms ever closer, debate to swing our vote for the referendum on 23rd June is becoming more and more heated.

For some the decision of whether to stay or leave will be decided by sentiment and gut feeling. But for many, including owners and employees of small and medium businesses (SMEs), that decision will be based on economics and the impact that a possible Brexit could have on UK trade. 

With more than half of UK private sector employment coming from small to medium enterprises and an almost even split for and against staying - a recent poll conducted by research consultancy TNS found that 37% of SMEs favoured Brexit while 38% wanted to stay in the single market - the battle is on. 

The problem with the debate so far is that whilst the concerns of large companies are being addressed, neither side is doing a great job of answering the questions of SMEs and in particular, those of fintech start-ups, who arguably have more to lose.

Many companies are especially concerned with the damage that Brexit could cause to their sector in terms of staying competitive.  A recent Financial News survey that questioned 118 Fintech professionals as well as investors and entrepreneurs found that over two thirds fear that Brexit will be damaging for the UK Fintech industry.

Why such a swing against leaving? For a start, think about how most fintech businesses are formed and you can see where the concern comes from. 

Many fintech companies start out with someone who has previous experience within one of the big financial houses in the City.  Combine their knowledge and contacts with the experience of cross continental tech talent, and the approval of the Financial Conduct Agency, and they have a proposition that can be put to market across the EU.

What Brexit could mean for those entrepreneurs is the stifling of talent flowing in to the UK from tech hubs such as Hungary and Estonia.

For many small and medium businesses, the cost and time implications of sorting out visas to hire outside the UK could prove too prohibitive. And making it harder for those people to enter the UK could drive talent away, towards other member countries with lower running costs such as Dublin or Madrid.

Another sore point is that of regulation.  The status quo currently suits fintech companies, but that could change quite drastically if we left.  Right now being a member means we avoid a lot of red tape.  Yes, if we left the government may decide to put more lenient regulations in place, but this would be meaningless if we then had to stay in line with the rest of Europe to secure continued market access.

Of course that may not be the case, but that uncertainty doesn’t sit well with most SMEs, especially those looking to expand their business across Europe.

In fact some fintech SMEs are already considering alternative offices.  Taavet Hinrikus, chief executive and co-founder of money transfer startup TransferWise said in Financial New’s survey that: "If the UK leaves the EU, we’ll have to consider whether it makes business sense to stay headquartered here [in London]. It’s a decision we don’t want to make but one that we’re having to consider."           

Another fear is that by leaving the EU we would weaken our position when trying to compete with our American fintech neighbours who already have the advantage of addressing a larger market. By dividing the European fintech market in half, we could end up being totally dwarfed by the US.

That said, while Brexit could pose issues for SMEs, and as many independent economists have already stated, a highly probable period of economic downturn – investors will still ultimately invest in promising companies, whether they are UK based or not.

The difficulty for many still unsure which way to vote is the uncertainty of the outcome either way. There are no facts to base a stay or leave decision on – no-one can claim with complete certainty what will happen in either instance.

So the best option may be base your decisions on the level of risk you’re most comfortable with - whether that’s a gamble on less regulation after another possible financial downturn, or the relative safety of sticking within a more powerful single market.

But when gambling on the economic future of the UK, we would err on the side of caution and vote to stay.