Encouraging small British firms to sell their goods and services overseas is a key plank of government policy, and there is now a range of organisations devoted to helping them do just that.
Official figures, however, show that only 5 to 10 per cent of UK SMEs are currently engaged in export. Allan Ross, managing director of First Independent Finance, an asset finance specialist and part of the LDF Group, talks about why exporting is important to smaller businesses, the specific financing needs they face, and why more firms aren’t doing it.
What proportion of your clients export?
The industry base that we service is very wide – from restaurants, to haulage, to manufacturers to agricultural firms. For some of them, exporting is exceptionally important. Many of our clients don’t sell overseas themselves, however, but are in the supply chains of larger exporters or provide ancillary services that assist in that process.
Take the Scottish whisky industry, a huge export earner. Most of the firms within it are not SMEs, but the farmers who produce the barley are, as are many of the haulage companies that transport the product and the bonded warehouses where the whisky is stored. They may not be exporters themselves, but their businesses are an integral part of export supply chains.
What particular challenges do small exporters face?
Alongside the general challenges that all small businesses experience, the most significant is the exchange rate. Exporters are currently doing quite well because of the fall in sterling since the Brexit vote, but when the currency is stronger, it is harder to remain competitive in foreign markets. SMEs will find it easier to export if they are known to have a product that is unique or higher quality than equivalent goods or services that can be found in the target country’s domestic market. That makes it easier to deal with any currency volatility.
There are also issues around building relationships with companies on the ground abroad. Having connections you trust and who can be relied upon to fulfil their side of any transaction is critical to successful exporting, and this can be more difficult to find in some markets.
Do exporters have different financing needs?
Exporters may need to wait longer for money to come in after a contract has been fulfilled and their cash flow may be more volatile due to currency changes. So they are likely to make greater use of financial products that smooth cash flow and enable them to keep operating while they’re waiting for the money to come in. Currency hedging products will be useful too.
Depending on the sector, Exporters by definition need to be internationally competitive. Depending on the sector they may need to spend more investing in machinery or equipment, so arrangements like asset finance,enable them to pay for capital investment over time are often be attractive.
Why don’t more SMEs export?
Small businesses, like other companies, won’t export unless they see an opportunity to make more money overseas than they can in the UK, and that tends to happen when the exchange rate is favourable. Given the pound’s current position, the export market is returning for many of our clients.
But there are also more fundamental things that hold them back. Lacking connections on the ground or not having a specialist or unique product will make exporting trickier.