Rebalancing the Economy: Trade and Investment

Written Evidence from the Forum of Private Business

Summary

Using our recent research [1] on exporting, in association with Global Reach Partners, the Forum of Private Business has put together some evidence for the Business Innovation and Skills Select Committee enquiry: Rebalancing the economy: Trade and Investment. In this paper we identify the main barriers to exporting for small and medium-sized businesses; lack of information on markets, cash flow risk and foreign exchange support. We recommend that if the Government wants to increase the number of SME exporters, it must tackle these issues by providing training and support for businesses, improving business support from financial institutions and taking greater control over currency trades.

Key barriers and policy changes required to encourage export

In our recent research on exporting, we found that out of the 49% of companies who did not export, only 11% were considering exporting in future (see Figure 1). This is a low number and there are a number of steps that could be taken to increase this figure.

Figure 1: Interest in exporting

There is risk involved in exporting which can put businesses off from exporting for the first time, as well as prevent exporters from exporting to new markets. The risks are:

Lack of information on markets

Lack of information on markets was the most frequently cited reason as a barrier for developing their business by the seasoned exporters surveyed, with 36% mentioning this. It was also a concern for non-exporters, particularly those who are considering exporting in the future (see fig.2), along with a lack of local presence. To some extent these are provided already through UKTI, however in the case of around a quarter of those who see the lack of a local presence as an issue, they also cite a localised client base which would tend to indicate a more manpower-intensive solution than using trade fairs and embassies to tap into a local distribution network.

Figure 2 – Barriers to exporting for non-exporters

Cash flow risk

Currency fluctuations were considered the most significant risk in terms of the cost of doing business internationally , w ith 63% of those surveyed considering this to be a sign ificant risk for their business. I ncreased shipping costs (31%) and payment of additional duty (28%) were the next most significant risks. 57% of businesses carry out credit checks on customers to reduce risk; Retention to Title clauses in customer contracts were used by 44% of businesses and a similar proportion are actively managing foreign currency risk. Just 18% have taken out credit insurance and 18% check that their suppliers have credit insurance.

Figure 3 – Impact of currency fluctuations

Currency fluctuations have an impact on business profitability, as shown in Figure 3. In our research we found 72% of SMEs had seen a noticeable difference to their profitability as a result of currency fluctuations. 26% have seen an increase in the overall profitability of their business, and 44% had seen a decrease. Exporters tended to see a positive outcome of the weakening of sterling with 36% seeing an increase, however 18% saw a decrease in exports as international trade declined. These businesses also reported an increase in import/raw material costs. In total, 36% saw a decrease in imports as a result of the higher costs of importing although 7% saw an increase. Overall, the supply chain seems to have weakened with 19% more seeing a decrease in the strength of their supply chain compared to 7% who saw it improve.

Assessing credit risk is important for businesses, as late payment and bad debt can be exacerbated by national boundaries. Compared to currency fluctuations, businesses involved in international trade seemed to be more concerned by late payment (net balance of 42%) and customer insolvency (41%).

Figure 4 – Comparison of other financial risks with currency fluctuations

Foreign exchange support

36% spoke to their current bank about the provision of foreign exchange services and 30% contacted a specialist foreign exchange broker. Trusted sources of information such as accountants (25%) UKTI (20%) and trade associations (19%) were also contacted whilst 19% used the internet to find the ideal supplier.

While 63% felt that the best rate was a significant factor in choosing the provider, 42% felt that speed and convenience of exchange was important as the person responsible for foreign currency (the business owner or financial director) has a multitude of other responsibilities. Control (41%) and competitive rates of commission (33%) were also considered. Security was not offered to respondents as an option but was reported by 2% of respondents of their own accord.

Exporting is particularly risky for start-ups as they do not have the cash reserves to fall back on. Small firms would like to see better systems in place to assess credit risk and providing these would help start-ups as well as existing exporters, or existing businesses looking to grow. Those already involved in international trade are more likely to be planning the introduction of new products or services.

In the current economic environment, businesses need to achieve value for money with tailored support designed to help them grow, particularly as weak domestic demand and the difficulty for businesses in attracting a price premium in the UK indicates that international trade is a key way to increase profitability.

Greater support is needed from Government support agencies for businesses internationalising their business:

· Training and support is needed for businesses in internationalising their business in order to increase their turnover. 67 % of UK companies that were not exporting felt that their business model was not conducive to exporting or that the business only satisfied a local need. However, as Starbucks has shown, there are potential solutions such as franchising or joint ventures that can be used to overcome these issues.

· UKTI provides support for both businesses looking to export for the first time and for experienced exporters. However, the research indicates that there is greater demand than supply in this area and that additional funding would help in developing UKTI’s services further.

· Support agencies must ensure that they are working cohesively and not duplicating support already available from the public sector. For example, a small business which is not able to attend a trade show because they cannot afford the time away from their business could be supported with a translation service and key distribution contacts.

Improved support to businesses from financial institutions is also required:

· Better protection for importers and exporters is n eeded from international credit ratings agencies. Businesses frequently complain that it is difficult to assess credit risk internationally and the information available is not always current enough to allow them to make an informed decision on the level of credit they should extend to trading partners.

· Overseas customers must be encouraged to pay invoices promptly.

· A greater range of financial products that support international trade – such as a greater range of choice on international merchant services, web-based foreign exchange products or products to effectively reduce the risk of international trading – is also needed.

Greater financial discipline is needed from businesses themselves:

· Businesses must be prepared to agree to greater financial transparency in order to improve their credit rating. To some extent this is already happening as a by-product of the credit crunch

· Businesses must also ensure that they research potential suppliers and overseas customers and look at a variety of sources of information.

· In addition businesses should also pay closer attention to detail on contracts so that businesses have recourse to legal redress in case of a contractual dispute.

Take greater control over currency trades to reduce the risk of international trade

· With currency fluctuations a key concern for businesses even before the sovereign debt crisis Global Reach Partners says that there are a number of steps that businesses can take to manage their foreign exchange risk and retain control over their currency management.

· Need to provide more info on emerging markets. Exporters are less likely than UK only traders to expand their current customer base. UK traders see new customers as an important area for growth, where as exporters see selling more to current countries as more important, rather than expanding to new markets.

Differing regulatory systems, the barriers they create and steps required to reduce such barriers

Differing regulatory systems do provide barriers to exporting. One of our members, an exporter of cryogenic storage vessels, has found excessive red tape a barrier to accessing some target markets. For example, they been unable to export to the Canadian market because of the bureaucracy involved in its technical licensing requirements.

The UK Government should provide businesses with more information on the regulatory systems of other countries, particularly those outside the EU, in order that firms know what steps they need to take to comply. This will also help them calculate costs, as the costs of compliance can be factored in to profit margin calculations.

The European Union has done some work on enabling businesses to access information for trading within the EU. One of the outcomes of the Services Directive was that each EU country must ‘Set up ‘Points of Single Contact’ through which businesses will be able to obtain information and complete procedures required for doing business.’ We believe that this has the potential to be useful for businesses but the signposting to the ‘Points of Single Contact’ must be very clear so that businesses know of their existence. At the moment we have no knowledge of the numbers of businesses who are even aware of the Points of Single Contact, which could prove to be a good resource to small and medium-sized businesses wanting to trade in other European Union countries.

B enefits of the European Single Market

Figure 5 – targeted location for increases in exports

Europe is the key market for both those who are looking to increase their exports and those that are considering exporting. Close proximity is one of the main reasons for this trend, however businesses have benefited from the similarity of the regulatory systems in member states, which has made trade easier. In addition, the single currency has benefited exporters, as it is easier to trade with the single currency, as opposed to multiple currencies, as was the case before the creation of the Euro.

About the Forum of Private Business

The Forum of Private Business is a proactive, not-for-profit organisation, providing comprehensive support, protection and reassurance to small businesses.

The organisation aims to deliver an exceptional service to its members, adding value through the provision of practical, tailored solutions that promote business success, and by being their voice in government.