Amidst domestic uncertainty during tumultuous times of Brexit and Covid-19, how can SME businesses best prepare and undergo exporting to new countries
Recent years have seen ongoing uncertainty for the logistics industry, and uncertainty creates a difficult market for exporting and finance. Not only have we had Brexit drag on for years, with little to no guidance from the UK government on changing legislation, procedures and paperwork, but the entire world has now been tackling Covid-19 for over a year, which has added pressure on an already delicate situation.
Carlos Carriedo, Senior Vice President of Global Commercial Services Europe at American Express provides guidance exclusively for International Trade Magazine on how SMEs can export to new territory despite domestic uncertainty.
Figures released by The Office for National Statistics on UK international exports in 2018 often made for difficult reading. The UK trade deficit, for instance, widened by £5.0 billion between March and May alone. When we published the 2019 findings of our annual study into the ambitions and mindset of senior SME decision makers for the year ahead, it was no surprise to see attitudes towards the UK’s international trade prospects were muted.
Indeed, the research – carried out annually among SME leaders across 15 countries and conducted by Oxford Economics on behalf of American Express – showed 64% of UK SMEs believe it’s harder to access new export markets than it was three years ago. In addition, only 16% say their supply chain has become more international in that time.
Of course, we must consider that the survey was carried out during arguably one of the most unpredictable years in the history of UK businesses, and subsequently the anxieties of operating in such a landscape are reflected in the findings. With the status of the UK’s future trade policies and relationships so uncertain, two thirds (64%) of UK SMEs feel threatened by policy, law and regulatory change.
Whilst we can’t quantify the impact of this international uncertainty on UK exports, our research shows export rates among SMEs to whom exports make up 10% of their revenues have dropped from 30% to 21% in the past year. And it appears this is largely due to a drop in confidence rather than competence. American Express’ research showed that of the 24% of UK SMEs that currently export, only a quarter are confident in their export strategy – 10% lower than last year. Furthermore, only 6% believe their company has the right plans in place to increase exporting.
So, what are the steps that SMEs can take to help boost overseas trade in the face of domestic uncertainty? Although the obstacles and challenges will vary depending on the product and market, there are several core precepts that will offer the best chance of success for SMEs looking to break into new international markets.
Do your homework
For any business, those first steps taken to export in a new overseas market are often the hardest. It’s therefore vital for SMEs to do the necessary research so they can pinpoint exactly where the demand for their product lies – and consider which products lend themselves to which international markets. SMEs that select a chosen few products or services for the right markets, rather than trying to take their whole offering overseas, are more likely to build growth sustainably.
A good place to start is to look at where their fellow UK-based competitors export to and in which markets they’ve enjoyed success. Of course, this is a balancing act, as if many competitors are operating in a single market it may become crowded and run the risk of over-saturation. Equally, if competitors are staying clear of particular markets, it could be a sign that there is simply no customer demand.
As well as analysing their competitors, taking the time to travel to new markets to experience and assess the landscape in person is a valuable part of the research process. We are fortunate to operate in a time where there are a wide range of digital tools available to help SMEs research new markets and establish relationships and connections. The Department for International Trade, for instance, offers a wealth of useful information about international markets online. But whilst online research is the first step, there’s no substitute for getting to know a new market first-hand and meeting prospects in person.
Once an SME has established what they want to export and to where, it’s time to get planning. The logistics of expanding abroad will mean contending with new customers, policies and regulations – and possibly a new language. SMEs that take the time to understand these obstacles, and build informed, data-led strategies for overcoming them have a significant advantage over those that don’t.
Finally, SMEs also need to plan ahead to ensure they have the internal resources in place to support overseas growth. This includes thinking about hiring employees with the language skills or knowledge of target markets. Exporting can offer a wealth of new opportunities, but businesses should be prepared to invest the additional resources and skills necessary for getting new ventures off the ground.
What’s the best route to market?
The most cost effective and simple way for an SME to explore exporting to a new market is to begin by trialling sales of their chosen product or service online in the selected new markets. Today, a strong digital presence is essential to easily access new markets and customers. Not only that, but it provides easily accessible information to help SMEs inform their exporting strategy.
If selling online isn’t a viable option for a business, there are plenty of other routes to consider. For example, companies can dip their toes into foreign waters via local agents or distributors who will already be established in, and have knowledge of, a specific market. Alternatively, they might consider licensing or franchising their product overseas, which reduces risk and allows for a swift set up. Businesses can also look to set up a division of their SME abroad, and sell directly to local customers.
Take the pain out of payments
Once SMEs have established their preferred route to begin exporting, the next hurdle can often lie in the form of payment systems. Many SMEs will not have a dedicated accounts department or finance officer, and therefore partnering with a provider that can offer them end-to-end solutions often makes commercial sense. These providers can assist in taking payments and settling invoices with overseas clients without draining precious time from the business.
For instance, at American Express, we use data from our integrated platforms to provide unique insights and benchmarking for customers to help inform decision making. We can also equip SMEs with practical information on the most suitable hedging strategies for their company. This will minimise foreign exchange risk and protect their margins from FX market volatility.
When it comes to payment options, like all aspects of exporting abroad, it’s important for SMEs to review their strategy regularly. In a changing world, market conditions never stay the same for long, and undertaking regular health checks on their export strategy can ensure SMEs are seizing opportunity and retaining a competitive edge.
Covid 19
The COVID-19 pandemic has spread with alarming speed, infecting millions and bringing economic activity to a near-standstill as countries imposed tight restrictions on movement to halt the spread of the virus. As the health and human toll grows, the economic damage is already evident and represents the largest economic shock the world has experienced in decades.
There are several ways the coronavirus pandemic affects the economy, especially SMEs, on both the supply and demand sides. On the supply side, companies experience a reduction in the supply of labour, as workers are unwell or need to look after children or other dependents while schools are closed and movements of people are restricted. Measures to contain the disease by lockdowns and quarantines lead to further and more severe drops in capacity utilisation. Furthermore, supply chains are interrupted leading to shortages of parts and intermediate goods.
On the demand side, a dramatic and sudden loss of demand and revenue for SMEs severely affects their ability to function, and/or causes severe liquidity shortages.
Given the limited resources of SMEs, and existing obstacles in accessing capital, the period over which SMEs can survive the shock is more restricted than for larger firms. Research in the United States suggests that 50% of small businesses are operating with fewer than 15 days in buffer cash6 and that even healthy SMEs have less than two month cash reserves. However, new exports, preparation and research can help keep SMEs afloat.
Beginning the process of exporting abroad can of course seem intimidating, particularly for those SMEs who are broaching it for the first time. Yet, with good preparation and solid strategies in place, the lucrative growth opportunities afforded by branching into new markets arguably outweigh the risks.
Commentary: Carlos Carriedo, Senior Vice President of Global Commercial Services Europe at American Express
For any business, those first steps taken to export in a new overseas market are often the hardest. It’s therefore vital for SMEs to do the necessary research so they can pinpoint exactly where the demand for their product lies – and consider which products lend themselves to which international markets. SMEs that select a chosen few products or services for the right markets, rather than trying to take their whole offering overseas, are more likely to build growth sustainably.
A good place to start is to look at where their fellow UK-based competitors export to and in which markets they’ve enjoyed success. Of course, this is a balancing act, as if many competitors are operating in a single market it may become crowded and run the risk of over-saturation. Equally, if competitors are staying clear of particular markets, it could be a sign that there is simply no customer demand.
As well as analysing their competitors, taking the time to travel to new markets to experience and assess the landscape in person is a valuable part of the research process. We are fortunate to operate in a time where there are a wide range of digital tools available to help SMEs research new markets and establish relationships and connections. The Department for International Trade, for instance, offers a wealth of useful information about international markets online. But whilst online research is the first step, there’s no substitute for getting to know a new market first-hand and meeting prospects in person.
Once an SME has established what they want to export and to where, it’s time to get planning. The logistics of expanding abroad will mean contending with new customers, policies and regulations – and possibly a new language. SMEs that take the time to understand these obstacles, and build informed, data-led strategies for overcoming them have a significant advantage over those that don’t.
Commentary: Director General Marco Forgione, The Institute of Export & International Trade (IOE&IT)
Now that the UK has left the EU, businesses face new challenges in a new trade relationship with our nearest and largest market. But with this comes a once in a generation opportunity to lead by example in rebuilding support for multilateral trade rules, resisting protectionist impulses and using trade policy to achieve environmental, health and social goals.
The way in which the government exploits its new-found freedoms, how it secures wide ranging trade agreements and its ability to forge meaningful trading partnerships will influence how we reshape the UK’s economy as we ‘build back better’ from the impacts of Covid-19.
IOE&IT has published a Policy Platform paper that is designed to be a blueprint on how the country can maximise its first independent trade policy opportunity in 45 years. Our ten-point action plan will create an environment which supports international trade and inspires more business leaders to export. The Policy Platform, which has the backing of Minister for Exports, Graham Stuart, highlights that trade really matters and will be crucial to driving life after Brexit and Covid-19.
Commentary: Louis Taylor, CEO of UK Export Finance
Finance is a key barrier coming between SMEs and their export potential. If small businesses were to export more, Britain would see even stronger economic growth.
In its centenary year, UKEF continues to enable companies from across the UK to expand their global reach by helping them succeed abroad. That’s why it is at the heart of my plan to get businesses ready to trade even when we have fully left the EU.
It is now estimated that 19% of SMEs believe they could export but do not. Across the UK, 60% of potential exporters cite access to finance as a key factor in their export plans. Late payments are the most critical issue with 63% citing it as a barrier to entry. Whilst 52% of payments are made at the point of supply, 45% of sales happen on credit.
This means that at any one time SMEs are owed an average of £64,000 in late payments, with 11% owed between £100,000 and £250,000. The consequences of this can result in damaging ripple effects that have a greater impact on SMEs compared with larger businesses.
Other key challenges to potential SME exporters included difficulty managing exporting procedures and paperwork, the length of time it takes to get paid by foreign buyers and the risk of not being paid at all.
The right finance and insurance can make all the difference for a company that is looking to sell overseas. There’s a wide range of specialist support on offer from both private sector providers and from UK Export Finance working with private sector providers, and we’re here to help UK companies access that support and realise their global ambitions.
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Media contact
Rebecca Morpeth Spayne,
Editor, International Trade Magazine
Tel: +44 (0) 1622 823 922
Email: editor@intrademagazine.com
