Will Brexit affect small business and startups?
Shockwaves are still strong in the aftermath of the U.K.‘s vote to leave the European Union. Twenty percent of the 1,000 U.K. businesses polled by the Guardian are considering a move outside the country. In the U.S., the Dow Jones Industrial Average fell more than 610 points on Friday in the wake of the news, as did the S&P 500 (3.6% down), and the Nasdaq (more than 4.1% down).
The uncertain outcome of the upcoming U.S. presidential election adds another layer of complexity to the volatility of the global economy. So it’s understandable that small businesses and entrepreneurs everywhere are watching carefully as the events play out on a global scale.
Jonathan Todd, an economist at NerdWallet, calls the situation “totally unprecedented” and could create a domino effect. “Businesses don’t respond well to uncertainty, and even though this event happened in Europe, it makes U.S. businesses wary,” he tells Fast Company. This could cause business investment in the U.S. to fall and limit economic growth, he observes. “This generally isn’t the best environment for starting a company or growing a burgeoning startup,” Todd says.
Andrew Chung, CEO of Compass Offices, an office services provider, that works with companies of all sizes in the Asia Pacific region, tells Fast Company that businesses were already less confident about growth this year due to the slowing Chinese economy. Recent events have further dented confidence, he says, adding that it could take months before markets settle down. “The economic environment in the region will continue to be shaky, and many small to medium businesses may need to reevaluate any planned investments over the remainder of this year,” he says.
Cody Townsend, the cofounder of Arcade Belts, an accessories startup that currently sells in North America and Japan, expressed concern for the business after the votes were counted. “As a small retail business developing European distribution, we’ll now have to have separate European distribution, meaning higher shipping costs, lower margins, and increased workload,” said Townsend on Twitter.
Christina Wojcik, VP of Legal Services at Seal Software, says Brexit will impact every business that trades with the E.U., whether a supplier or purchaser.
“Small business owners, along with multinational companies, must understand that hundreds of laws, rules, and agreements governing everything from trade and immigration to agricultural subsidies will be rewritten, and that will impact contractual agreements,” Wojcik says.
For example, she says, any contracts with territorial provisions, such as for distribution or licensing agreements, or invoicing provisions pegged to the euro or the pound, should be reviewed “to see if the necessary risk protections are there.”
Sara Holoubek is CEO and founder of Luminary Labs, a business consultancy to Fortune 500 companies. She’s also an active adviser and investor in early-stage startups. As such, Holoubek points out that our economy is interconnected, and small businesses like Arcade Belts are highly dependent on the actions of big business.
“Regardless of how cash rich a corporation may be, focus is narrowed, budgets get tighter, and appetite for experimentation is reduced,” Holoubek says. “Small and growth businesses would be wise to read the tea leaves of the organizations they currently serve, especially as we enter budget-planning season,” she advises.
Holoubek and others also see Brexit as a potentially opportune time for small businesses.
Lucas Puente, an economist at Thumbtack, an online service that connects people with skilled local professionals, is “cautiously optimistic.” He sees that while Brexit is already having a significant impact on U.S. financial markets, he doesn’t think small businesses and skilled professionals have much to worry about, at least in the short run. “The one caveat is if we do start to see contagion from this event and the underlying American economy starts to weaken,” he says.
“We saw something similar in January, when concerns about a dip in global aggregate demand led to the S&P 500’s worst-ever start to the year,” he says. However, Thumbtack conducted a survey that reached over 12,000 small business owners, which showed they were still “bullish” about growth in 2016. Puente says that’s because demand for services by the U.S. consumer was and is holding steady.
Todd at NerdWallet notes that interest rates in the U.S. are likely to stay lower for longer because of the global economic volatility caused by Brexit. He believes this helps entrepreneurs in a couple of ways.
“For any company, this will likely make borrowing costs lower compared to a ‘remain’ result,” says Todd. That means an entrepreneur wanting to make an investment to grow their business can borrow at generationally low costs. “As long as that small-business owner is confident that they can get through a bit of near-term uncertainty, they will never have cheaper borrowing costs to grow their business,” Todd says.
Technology startups have thrived in recent years, precisely because of the slow growth across the U.S. economy, Todd maintains. “With low interest rates, investors need to put their cash in riskier companies in order to earn higher rates of return,” he says.
Now that Brexit has happened, Todd believes slow growth here in the U.S. is likely to continue. “Paradoxically, even with all the economic and political uncertainty, if a tech entrepreneur has a good idea, it could continue to be a great time to go out and try to raise capital,” Todd contends.
Holoubek concurs, but for different reasons. She founded her company in 2009 to help corporations adapt to economic, technological, social, and political change.
“When major corporations, nonprofits, and governments are seeking to formulate strategy in the face of tomorrow’s unknowns,” she says, a small business may have the answer.
“The strongest of small businesses know how to withstand turbulence, adapting quickly to changing environments,” Holoubek says. “When your service or product helps larger corporations do the same, times of great uncertainty become a win-win.”