Minimising working capital disruption is the key to successful trade

A contribution from Bibby Financial Services

For SMEs experiencing a plateau in their domestic growth, seeking new revenue streams overseas marks a logical step forward. Bibby Financial Services’ (BFS) latest SME Confidence Tracker revealed that 40 per cent of the UK’s SMEs are working across borders, an annual increase of 8 per cent. This equates to roughly 2.25 million* businesses looking beyond domestic shores to grow their business.

But while these potentially lucrative overseas offerings for SMEs are tempting, businesses need to be fully aware of the challenges they will face before engaging with suppliers and customers abroad. Working across borders means an SME’s working capital will be dependent on a number of complex processes, potentially increasing the pressure on a company’s bottom line. Negotiating a new set of varied customs arrangements, payment practices and working hours that each market adopts is a task in itself. SMEs without the correct structure in place could find themselves having to jump through hoops in order to receive payment or goods from abroad.

To mitigate these issues, SMEs should negotiate payment terms with overseas partners that align with their existing cashflow structure as best as possible. SMEs need to ensure they receive guarantees of payment from their customers before committing to making payments themselves, or run the risk of late payments fines and damaging existing relationships. When negotiating terms, businesses should therefore consider if they have the capacity to pay suppliers up-front, to access potential discounts.

managing working capital

Arguably the most troublesome aspect of overseas trade is contending with currency fluctuations, which can give headaches to even the most seasoned of traders. BFS’s Trading Places research found two-thirds (67 per cent) of SMEs with FX requirements have been adversely impacted by currency volatility while trading overseas, illustrating the scale of the problem. This applies for exporters as much as importers. Despite the fall in the pound boosting the attractiveness of their goods to foreign buyers, exporters are not immune to having volatile currency fluctuations wreak havoc on their working capital. To better prepare for these eventualities, SMEs need to ensure they have sufficient cash reserves and have sought professional guidance on how to hedge currency risks. 

Importers, meanwhile, face an additional set of unwelcome challenges. They are frequently forced to take unconventional measures to bridge cashflow problems that arise from working with a diverse set of customers and suppliers. In fact, our research found that the average importer is dealing with 10 overseas suppliers in 5 different countries, illustrating the raft of potential complexities. Managing the logistics as well as the duty, VAT and freight payments across so many markets poses very real risks to capital.

BFS has long advocated for the private and public sectors to work more closely to better educate importers and exporters on how to overcome these challenges. While it remains to be seen what the UK’s trading environment will look like in the event of the UK’s departure from the EU, it is reassuring to see the Department of International Trade and UK Export Finance (UKEF) announce fresh initiatives to boost exporters’ prospects. The new General Export Facility will allow UKEF to support exporters’ overall working capital requirements, rather than linking support to specific contracts. This extension of support means a wider range of exporters will be able to access the support, specifically smaller businesses and those with more fluid business cycles. 

While trade finance facilities give importers the option of paying overseas suppliers in advance of goods being shipped, businesses also benefit from integrated foreign exchange services and expert guidance to better manage currency risks. 

With the prospect of a no-deal Brexit remaining very much on the horizon, the future trading environment is at best, ill-defined. However, it is encouraging to see growing numbers of businesses implementing their overseas business strategies. Leveraging the broad range of support on offer is the best way for SMEs to ensure years of long-term planning are not undone by an insufficient level of working capital.

*= Business Statistics, House of Commons Briefing Paper, December 2018:
Topics: Contracts, Credit Facilities, Currency Exchange, Export Planning, Finance, Grants, Insurance & Risk, Loans, Management, Payments, and Purchasing
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