Effects of Brexit on the United Kingdom’s Small Businesses

Introduction

Since the United Kingdom (UK) decided to leave the European Union (EU), also known as Brexit, its economy has faced several challenges and complexities. Moreover, this decision led to a significant shift in the laws controlling how UK corporations conduct business locally and globally. In particular, small and medium-sized businesses (SMEs) in the UK have been struggling to identify effective strategies to adjust to the new landscape, which resulted in skill shortages, lack of debt financing, and increased operation costs, directly impacting their activities of trading goods and services.

Skill Shortages

Brexit-induced restrictions on immigration have disastrous effects on access to acceptable labor inputs, which has led to a skills shortage for SMEs and impacted the nation’s economy as a whole. According to a study on the probable link between Brexit and skill shortages in the UK, over twenty percent of total SMEs identified the country’s exit from the EU as a critical impediment to their firms, suggesting that it might trigger talent gaps and hardship in staff recruitment for organizations.¹ It implies that the UK cannot maintain an experienced workforce and must find other non-EU alternatives for high-skilled labor, or these businesses may continue facing a labor crisis because they rely primarily on immigrants. Therefore, the lack of an affordable and reliable workforce has impacted many companies in the UK since Brexit threatens the free labor movement, which has short-term and long-term effects on running SMEs.

1. Pattanapong Tiwasing, “Brexit and Skill Shortages: An Empirical Analysis of UK SMEs,” Economics and Business Letters 10, no. 1 (2021): 14, https://doi.org/10.17811/ebl.10.1.2021.9-15.

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Lack of Debt Financing

A significant share of SMEs faced increased barriers to loan financing, resulting in financial constraints and reduced capital investment for running business activities due to the uncertainty of lenders created by Brexit. Research findings contend that SMEs in the creative industry may encounter more impediments to debt financing and frequently have their finance applications refused, and they are more readily discouraged from seeking debt financing, especially during times of uncertainty, like the UK’s exit from the EU.² As a result, financial institutions may reduce the total amount of credit extended to these businesses, which could have a ripple effect on their efforts to expand their activities. Thus, Brexit led to economic shock in the UK, which instilled uncertainty among financial institutions hindering various firms from accessing credit and the lagging growth of many SMEs.

2. Raffaella Calabrese, Marta Degl’Innocenti, and Si Zhou, “Expectations of Access to Debt Finance for SMEs in Times of Uncertainty,” Journal of Small Business Management 60, no. 6 (2020): 1352, https://doi.org/10.1080/00472778.2020.1756309.

Increased Operation Cost

The Brexit-induced supply chain model has increased prices for importing trading commodities and raw materials for production, making it difficult for SMEs to adapt to the new changes. In a study of 1168 businesses surveyed, more than 90 percent were SMEs, 77 percent claimed that Brexit was not supporting them in increasing sales, 56 percent had difficulty adjusting to new laws, whereas 80 percent reported that the cost of importing products had risen.³ The new Brexit trading arrangements have resulted in increased import and consumer prices, decreased investment, and slower growth in the gross domestic product leading to the high cost of running small businesses. Hence, many taxes induced by Brexit increase the burden on SMEs carrying out their activities at affordable and available resources, negatively influencing their chance of thriving.

3. Ken Clark and Stephen Drinkwater, “Self-Interest or Self-Defeating? How the Self Employed Voted in the EU Referendum,” International Small Business Journal: Researching Entrepreneurship, (2023): 13, https://doi.org/10.1177/02662426231184341.

Conclusion

In the UK, Brexit affected SMEs through skill shortages, lack of debt financing, and increased operation costs, influencing their survival. The increased taxes by Brexit on imports and induced restrictions on immigration labor significantly impact SMEs and their operations. Therefore, the UK’s exit from the EU impacted SMEs and their sustainability adversely.

Bibliography

Calabrese, Raffaella, Marta Degl’Innocenti, and Si Zhou. “Expectations of Access to Debt Finance for SMEs in Times of Uncertainty.” Journal of Small Business Management 60, no. 6 (2020): 1351–1378. https://doi.org/10.1080/00472778.2020.1756309.

Clark, Ken, and Stephen Drinkwater. “Self-Interest or Self-Defeating? How the Self-Employed Voted in the EU Referendum.” International Small Business Journal: Researching Entrepreneurship, (2023): 1–16. https://doi.org/10.1177/02662426231184341.

Tiwasing, Pattanapong. “Brexit and Skill Shortages: An Empirical Analysis of UK SMEs.” Economics and Business Letters 10, no. 1 (2021): 9–15. https://doi.org/10.17811/ebl.10.1.2021.9-15.