Unprecedented uncertainty, a weaker pound and post-referendum inflation have already hurt some UK businesses, but should we expect to see a further rise in corporate insolvencies once we’ve left the EU? Although we still have very little idea what form the UK’s exit from the EU will take, we’ve canvassed industry experts to bring you this guide.
What is the consensus in the insolvency industry?
According to a recent survey of its members by the insolvency and restructuring trade body R3, the majority of industry experts believe there will be a rise in insolvencies after Brexit. However, the extent of the impact will depend on how we leave. Insolvency insiders are most concerned about the impact of a ‘hard Brexit’, with 76 percent predicting a rise in corporate insolvencies, while a ‘soft Brexit’ is seen as a less risky proposition. The businesses expected to be the hardest hit include those in the financial services, manufacturing and retail industries.
A no-deal scenario could be very disruptive
A study by Atradius has found that UK insolvencies could be 14 percent higher if we leave the EU without a deal in place. That translates to the failure of around 2,300 more businesses. Uncertainty is one of the most overused words of last year, but it is this nebulous concept that will continue to have a negative impact in the short-term in the event of a hard Brexit. The result would be a decline in economic growth as businesses and consumers delay buying decisions until they have a clearer picture. Unfortunately, some businesses will inevitably suffer as a result.
Why are insolvencies likely to rise?
A hard Brexit will lead to higher tariffs on the export of goods and services from the UK, which will reduce the profit margins of firms that are already being squeezed by a domestic and global economic slowdown. It’s also predicted that higher tariffs on imported goods will start to push up inflation, which will face further pressure from the weaker pound. Higher rates of inflation will reduce consumer spending, which is likely to be felt by firms in the retail and hospitality sectors.
In the event of a no-deal Brexit, there are also likely to be significant barriers to trade. New border checks, particularly on food and agricultural products, customs controls and regulatory barriers will all increase the costs, administrative burden and the time it takes to ship goods overseas. There will also be an impact on service providers, as regulatory restrictions will play a more prominent role. Individual authorisations will have to be sought to trade with each EU member state individually. That will take time and temporarily reduce the ability of UK firms to trade overseas.
Smaller businesses will be most at risk
It’s perhaps not surprising that smaller businesses will be most at risk once we have left the EU. The tightening of consumers’ belts will lead to a drop-off in spending which many smaller businesses will not be able to absorb. There’s also likely to be a reduction in bank lending, with heightened uncertainty potentially motivating banks to tighten their criteria. That could make it more difficult for smaller businesses to access the overdrafts and bank loans that they typically rely on to manage a temporary fall in sales.
Only time will tell what the impact on insolvencies will be once we’ve left the EU. However, the signs are that we should expect to see an increase in insolvencies, certainly over the shorter-term.
Simon Renshaw
About the author
Simon Renshaw is an insolvency practitioner and director of AABRS, a company that provides a range of debt advice and rescue services to small and medium-sized businesses.
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