As was noted in last year’s report by the University of Surrey, Success in Challenging Times: Key lessons for UK SMEs, just 45 per cent of small businesses survive their first five years of trading. That is a frightening statistic given the reliance our economy has on SMEs, which make up the vast majority of all registered companies and employ roughly half of Britain’s workforce.
There are numerous factors SMEs should examine regularly, yet many either do not devote adequate efforts to investigate them or completely overlook or ignore their significance. These include trade finance options, government assistance, foreign exchange, international payments and credit insurance.
A thorough examination of these aspects will help company directors to identify risks facing the business, providing an opportunity to identify efficiencies and cost reductions, devise and implement risk mitigation strategies, and put the business on the path to success.
Understanding the world of finance is something that very few people master. Even experienced Finance Directors of large organisations often struggle to fully comprehend the types of financial products required to meet a business’ needs.
The first port of call for most SMEs is their local bank, although as studies and media reports have made abundantly clear, the response these businesses receive from their bank is often less than desirable.
However, there are plenty of alternative sources of funding available to growing businesses, even in this challenging economic environment. Finance consultants, trade bodies, brokers, second tier banks, non-bank lenders, silent investors and invoice financiers are all valid sources of capital for businesses to fund growth and meet incoming orders. Some even cater specifically to SMEs, meaning they are more willing to lend to smaller businesses and possess a much better understanding of their financial needs and constraints.
One major factor in successfully obtaining funding is to identity your business’ exact requirements, allowing you to target the appropriate lenders and only apply for relevant finance options. This could be a need for working capital to fill orders, stock finance to purchase raw materials, or invoice finance to release money tied up in outstanding invoices – just to name a few.
Unfortunately, it is all too common that businesses are turned down for a loan from their high street bank and, believing no other options are available, resort to either dipping into essential working capital reserves to fund expansion or turning down new opportunities. Chances are that if your business is growing, with a strong financial footing, there will be a lender willing and able to meet your funding requirements.
What many SMEs do not seem to realise is that Government assistance is available to help small businesses expand, particularly those looking to do so in overseas markets.
Start-up companies can benefit from UKTI’s Passport to Export Service, which provides specialist training and advice in launching into new overseas markets. There are also government-funded support schemes for market research, representation at international trade shows and so forth which are needed to qualify target markets.
As you can imagine, there is only a limited budget when it comes to such assistance, meaning there are strict eligibility requirements, lengthy application procedures and tight funding allocations. Having said that, these schemes can be a valuable source of assistance when opening up new trade with foreign markets.
International payments and currency transfers
Paying for raw materials sourced from an overseas based supplier, supplying capital to offshore operations or converting payments received in a foreign currency all raise a new set of challenges.
Currency rates fluctuate by the second, meaning the cost of transferring funds is never certain. It is not an exaggeration to point out that currency volatility can mean the difference between a healthy profit and a substantial loss on any given trade.
Accepting spot contracts (i.e. the rate available at the time) can often, though not always, be the least efficient way of making transfers, however many SMEs do so because they are not aware that other options are available or appreciate the significance of rate movements on their bottom line.
All sorts of domestic and international events and data influence exchange rates, so knowing what is happening in the countries in which you operate will go a long way to helping you determine when you will achieve the most desirable rates.
Beyond the actual exchange rate, there can be expensive transfer fees on any trade you make, which quickly add up. High street banks in particular are notorious for these fees – as much as £30 or more per transfer – as well as providing inferior exchange rates.
As with trade finance, there are plenty of options available to get a better deal, such as currency specialists and brokers, which specialise in providing currency services and cost-saving measures to the corporate sector.
While on face value insurance can seem more like a financial burden than a cost-saving measure, credit insurance can be a valuable tool for many businesses to streamline their operations.
This form of insurance is effectively income protection for businesses. However, unlike that available to private individuals, there are a number of additional business benefits of taking out such a policy which may not be readily recognisable.
Credit insurance enables your business to reduce bad debts, avoid the pains associated with a client falling into bankruptcy, improve overall business cashflow and offload the onerous responsibility for chasing late payments .
Additionally, the security from such a policy can positively influence applications for funding and act as an auditing service for potential new clients.
Particularly for businesses trading abroad, there is a distinct need to have contingencies in place to manage the implications of external factors on the business. While such events are not able to be predicted or avoided, planning provisions should be in place to cover the immediate response and ongoing impacts of natural disasters, customer insolvency, late payments, political factors, accidents, social unrest and so forth.
While many of these factors are relevant to local trade, the risk is infinitely greater when trading abroad, given the business is exposed to more than one country.
Any SME operator knows that it is not feasible to hoard money for such a potential crisis, which is why risk mitigation strategies are crucial as a means of putting the business in a better position to manage crises – small and large – should they happen.
This is where specialist advice is worth its weight in gold. Not only can specialist professionals assist in obtaining the right financial products for your business, they have better insight in identifying risks associated with your operations and can help you develop tailored risk management strategies to minimise the impacts of these risks.
More often than not, SMEs are a specialist business providing a specialist product line or service – it generally takes that same level of specialisation to help SMEs reach beyond their fifth birthday.
For more information and to read the full report click here.