Open to Export spoke with trade finance expert Mark Emmerson, Head of Global Trade and Receivables Finance for HSBC in the UK, about things to think about when managing your working capital needs when you begin to export, including how your bank can help you.
Mark Emmerson is Head of Global Trade and Receivables Finance for HSBC in the UK. Mark has worked with HSBC for over 25 years, and was previously Head of Trade and Receivable Finance, Continental Europe, as well as Head of Corporate Banking, Indonesia. Mark is also a Committee Member of the International Chamber of Commerce, UK.
What is working capital and why is it important for small business?
Working capital is the amount of money that a company has tied up in funding its day to day operations (stock, debtors and work in progress). A company has to tie up money to fund credit sales, for which payment will not be received immediately, and other current assets, but this is offset by its ability to fund this from current liabilities such as purchases on credit.
How will working capital needs change when you start exporting?
It’s important to realise that, whether you’re operating purely in the UK or going abroad, the principles of managing working capital for a small business stay the same. You still have to get the right balance between making purchases and sales.
The challenge is that lead times change when you are selling internationally. They can be longer and therefore there is a need for more finance, with the challenges of less control of stock and the ability to collect debts can be more stretched. You might also need to take into account seasonality depending on where you’re exporting. If you’re a winter clothing company you might find sales drop off in the southern hemisphere during the UK winter, for example!
It’s also important to get a clear idea of what your costs are going to be – such as shipping and fluctuations in exchange rates.
The task is made much more manageable with the early involvement of banks, export agencies and other parties who can help to provide guidance and financial support.
What are the tools and services out there that can support a working capital strategy?
When you’re looking at exporting, the way you do business should not change as I mentioned before, but there are a number of financing options:
- Receivable finance, where you can receive the proceeds of the sale upfront, is often a good solution as it relieves a lot of pressure on working capital.
Also check out this Open to Export article on discounting invoices for more details on receivable finance.
You can also look at other forms of bank finance.
- Import financing solutions: these are designed to make payment to your overseas suppliers before receiving payment from your buyers, unlocking funds to use elsewhere in your business.
- Export Financing options are available which provide additional protection. These solutions are tailored to match your working capital cycle and can be easily drawn down against individual transactions.
So often, it’s not the actual financing solution but the level of advice and knowledge that you have available that makes all the difference.
The HSBC Knowledge Centre offers all sorts of expert insights and a huge range of checklists and briefings to launch, run and develop a working capital strategy, including business planning tools and a trade cycle calculator – all with the aim of helping small businesses to better understand their working capital flow to make sure they have the right funding and support in place.
How can a business ensure they are dealing with overseas suppliers and buyers who are financially healthy? What services are in place to help with this?
First of all, it’s very important to check on any credit references that are available. Make sure when you are first doing business with a new buyer you take the same the precautions you would in the UK.
Initially it’s wise to negotiate payment terms that involve either a deposit upfront or a documentary credit to add a degree of certainty to the payment process. Over time when you build up confidence and trust, you can change your payment terms, as you would with a buyer/supplier you’ve come to trust at home.
There is also support available from bodies such as UKEF, who offer services in partnership with banks that support British companies looking to export – there’s a range of products now available, such as guarantees.
How can banks help small businesses with their working capital needs?
Your bank is very much a partner and from a banker’s perspective, we want to understand your business and your objectives.
The first thing your bank should do is sit down with the key contacts in your company and work through your trade cycle so that both you and the bank understand the funding and support required. Then, the most appropriate trade financing solutions will be offered.
All of the solutions I’ve mentioned earlier can be provided by the banking industry. HSBC, in fact, was established 150 years ago to provide finance for international trade. Today, we have over 5,800 trade specialists in over 60 developed and emerging markets. We have experts in everything from how to do business in China to what trade credit references are available in Latin America, and we love to share that knowledge with our UK customers.
Finally, what would be your top tips for keeping cash flow going when trading overseas?
- Do your homework and research ahead of diving in to a new overseas market.
- Talk to your bank about what they can do to support you – introductions; knowledge of how business is done; and what working capital solutions the bank can offer you.
- Beyond banks, also look at the other support and advice that is available. Make use of Open to Export, DIT and UKEF. These organisations provide a wealth of experience and knowledge to help you.
But I’d also encourage small businesses to recognise the tremendous opportunities in the emerging markets – there is now an amazing demand for British consumer brands and service.
HSBC’s Ambitious Business Report showed that 76 per cent of UK businesses surveyed are planning for growth in 2015 and two thirds of business leaders (66 per cent) are confident in the current economic climate. Now is not a time to be sitting still – if you’ve ever thought about going global with your business, 2015 could be your year!