For many businesses planning for growth, the prospect of export can be a highly attractive, but sometimes daunting, opportunity.
According to the Department of Business Innovation and Skills (BIS), approximately one in five of the 4.9million SMEs already export and the Confederation of British Industry (CBI) says you’re 11% more likely to survive as a business if you follow a sales path outside of the UK. So it seems natural for many SMEs to make the leap into international trade, especially since many have suffered from stagnant or declining growth domestically in recent years.
But with growth, new business wins and foreign expansion comes a degree of risk. Among the cultural, legal and bureaucratic barriers sits the challenge of finance – finance to support the venture, finance to support new business, and finance to keep cashflow healthy.
The ‘cashflow void’ of SME export
Standard considerations as an exporting business include adoption of a localised approach, adaptation of pricing strategies, a local agent partnership and support from a foreign trade advisory service such as the UKTI.
But when planning a move into the global arena, or building on existing international share, SMEs are faced with a number of challenges and difficult choices. Of course you want to be successful and win multiple, high value contracts – but you also recognise that you may need to make some adjustments and allowances in order to get where you want to be.
Recent data from the Economia Exports Survey, in association with Lloyds Bank, suggests that SMEs new to international trade – or even experienced exporters moving into new markets – cite a number of success factors when exporting. These include the right finance being in place (34%), the ability to manage payment risk (26%) and solid management and leadership skills (28%). In the same survey, the concerns associated with export included the costs of exporting (36%), not getting paid (29%) and risk control (29%).
The international market is highly competitive, and building favourable credit terms into new contracts may be the difference between winning or losing a deal. This is especially the case when you are faced with the risk of taking on a larger, multinational client – a big contract opportunity in itself can often be the catalyst for businesses exporting for the first time.
When you are at the complete mercy of a larger client’s terms, foreign exchange fluctuations and cash flow management can present an issue. Not only might you have to manage extended credit terms but high value material costs may need to be paid up front, and components will now take longer to be shipped to the customer. The result is a cashflow void, and small businesses need to have cash management strategies in place to lessen the negative impact this might have on their operation.
Financial flexibility and security for healthy international trade
Short-term finance is sometimes a necessity to bridge this gap between supply of the product or service and payment receipt. Traditionally, financial securities such as International Documentary Collections and Documentary Credits have offered exporters peace of mind when it comes to payment. However, it is estimated that as many as 80% of exporters have now moved away from these somewhat burdensome trade finance products. Instead, conducting global trade on the more cost and time efficient open account basis.
For small businesses trading with a customer for the first time though, trade finance might not offer much help if less than favourable terms have already been agreed – similarly, an open account may be a risky option so early on in the relationship.
To overcome the financial challenges of operating in foreign markets, invoice finance has emerged as a new form of trade finance and allows invoices in foreign currencies to be traded. This means that businesses can remove the ‘cashflow squeeze’ that occurs in contract delivery.
The result is a flexible and competitive way to raise short-term working capital with no lengthy contracts. SMEs can obtain up to 90% of their international invoices upfront from business-savvy investors who understand the commercial realities of international trade and bid between themselves to provide the lowest cost of finance.
When essential cash is needed to finance the up-front payment of materials and maintain a healthy operation until the end customer pays, invoice finance can provide a valuable lifeline.
Ultimately, the success of a business may arise when a risk is taken. In the context of international export, that risk may be the acceptance of a new, large customer. The right short-term finance and cashflow products in the form of selective international invoice sale and repurchasing can provide one of the building blocks for export success.
About the author: Beth Nicholas is an approved writer for Platform Black – provider of complementary and alternative finance solutions including invoice finance, supply chain finance and channel finance.
Countries: United Kingdom
Topics: Finance, Getting Started, and Winning Global Contracts