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How small companies can offer protection against Brexit

How small companies can offer protection against Brexit

Britain’s divorce from the EU has created an unprecedented level of uncertainty around the UK economy.

Whether we end up seeing a hard Brexit, a soft Brexit, or even no Brexit at all, small companies will remain the lifeblood of the UK economy.

Investing in stocks which offer true growth potential, both financially and in terms of number of employees, provides exposure to a significant part of the UK’s future.

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These innovative companies will prosper, regardless of the UK’s wider economic health and give vital protection against Brexit.

Vital market

According to the Federation of Small Businesses, at the end of 2016, 99 per cent of the 5.5m total UK companies were small or medium sized firms (SMEs) employing up to 249 people.

Total employment in these companies was 15.7m, or 47 per cent of all private sector employment in the UK. Their combined annual turnover was £1.8trn - just shy of half of all private sector turnover in the UK.

UK chancellor Philip Hammond acknowledged the importance of SMEs in November. He unveiled plans to unlock £20bn of new investment in UK scale-up businesses and a £2.5trn seed pot.

This money can only be invested in firms deemed high growth, directing capital to innovative companies which can provide a valuable source of UK job creation.  

By backing SMEs like this, the government has fully acknowledged the importance of funding these young businesses when they need it most.

However, an increasing deficit in funding for fast-growing stocks approaches from a Brexit-triggered withdrawal of the European Investment Fund. It is important companies are not further cut off from existing funding lines.  

A vital source of funding for SMEs lies in Venture Capital Trusts (VCTs). HMRC has granted investors 30 per cent tax relief on VCTs as an added bonus on top of already tax-free growth and dividend payments.

Robust opportunities

It has become clear since the referendum that stockmarkets have the ability to wrong-foot even the most experienced investor.

Who could have predicted the FTSE 100 index would rebound to all-time highs after collapsing immediately following the Brexit vote?

It is important to be aware of factors like currency and inflation in these times, of course.

But investing in innovative young companies which are capable of organic growth and sustainable cashflow generation are where long-term returns potentially lie. 

Robust, investible companies must possess growth, ambition, and passion.

For these firms, development is less about how their business model does or does not benefit from the macro-economic environment.

They are growing because they have caught onto changing consumer tastes before more established names in their market; they are founder-led, and are quick to adapt to changing circumstances such as Brexit, turning changes into opportunities – this is something smaller, growing companies are, unencumbered by a legacy, more adept at.