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The export incentive

Written by Adam Pescod on Wednesday, 04 September 2013. Posted in Growth, Finance

With the government pinning a fair share of its economic hopes on an SME export boom, there’s more reason than ever for entrepreneurs to set their sights abroad

The export incentive

Exports, exports, exports! This rallying cry certainly seems to be at the forefront of the government’s relentless drive towards economic redemption. Such is the desire to see more SMEs selling their wares overseas, the powers that be have set an ambitious target: 100,000 additional businesses exporting by 2020. An admirable aim indeed and with a projected £5.6bn to be added to the UK’s coffers as a result of reaching this lofty goal, there does appear sound economic reasoning behind it. More than this, however, it gives our nation’s small-business leaders the chance to shine on the international stage. Who can argue with that?

Of course, expanding one’s enterprise to foreign climes would appear a no-brainer for many an entrepreneur, not least from a monetary perspective. “The fairly obvious financial benefit is that you are spreading financial risk in exactly the same way that a conglomerate spreads financial risk,” says James Hardy, EMEA director for global small-business e-commerce platform Alibaba.com. “Once you are operating in two or more markets, even if one market suddenly has some problems, then you can often get protection because the other market is doing well.”

Hardy adds that exports can also bring welcome relief when the economic situation in an entrepreneur’s domestic market is far from rosy – compared to the markets it is looking to exploit. “If your economy is really struggling then generally the exchange rate will fall,” he explains. “That means that any revenues you are bringing in from abroad have effectively increased automatically.”

He goes on to suggest that selling to countries with alternative economic arrangements can prove more fruitful than trading across the channel, for example. “If you pick England and France, you don’t get nearly as much of a hedging or risk-spreading effect as you do if you are selling to Malaysia, India or China,” he says. “If you have two very different types of markets, then you can often get very significant protection once you have made the initial time and effort and financial investment of being in that emerging market or other non-first world market.”

Ultimately, there is always an element of risk involved when investing in markets that are unknown quantities. Nevertheless, Hardy believes that any SME with sizeable competition at home could find itself with much to gain from taking a plunge in more exotic climes. “It may be that in your home market, you are just another producer in that space,” Hardy continues. “But if you can find the right overseas market, you can suddenly put yourself in a better position where you can ask for higher margins, especially if your brand is perceived as being a higher value brand than it may be here.”

In this sense, it would appear that the real challenges of exporting revolve more around brand recognition abroad, and negotiating the predictable logistical obstacles. From a mere financial perspective, the initial ‘cost of exporting’ shouldn’t prove too taxing, so long as a company already has a solid-looking balance sheet. “There is a huge opportunity if you can deal with the immediate short-term cost, which is very often a time and resource cost, rather than a cash cost,” says Hardy. “The reason it is not so much of a cash cost is that global duties have been coming down for the last 20 years, and shipping costs have come down hugely.”

And, while some foreign markets may come with an entry cost that puts off some SMEs, Hardy believes this can be used to one’s advantage. “If you are prepared to go somewhere that actually is a difficult market to enter, you will have given yourself a significant long-term advantage by getting into that market early, especially if it has good revenues, good returns and good margins,” he explains.

Yet, despite the attractions of exporting, it is still imperative that an entrepreneur has everything shipshape before setting sail. To that end, effective budgeting can ensure that one doesn’t sell oneself short in a bid for global success – and it almost goes without saying that such a process should take account of any unexpected financial challenges that may arise from an overseas adventure, in addition to the obvious ones. Hardy identifies currency fluctuations and varying payment terms as the two biggest threats, placing emphasis on the latter, primarily because it isn’t out of the owner’s hands. “Payment terms vary significantly by culture, and are dependent on the arrangement you have,” he says. “So, if, for instance, you have a distributor, you want to be extremely aggressive in negotiating payment terms up front so as soon as the distributor receives money, you receive money from the distributor.”

Howard Harrison, co-founder and CEO of designer bag and tech accessory firm Knomo, can certainly vouch for the complications alluded to by Hardy. “We have actually stopped doing business in Italy because I think during the crisis there has just been too much financial risk there, and we found recovering invoices very difficult,” says Harrison. “There is a little bit more payment integrity in the Scandinavian and German markets than what we have seen in the Mediterranean markets.”

There has also been a significant cost involved on the logistics front for Harrison, but he is safe in the knowledge that it will pay dividends in the long term. “We have a warehouse in the UK and getting products into Asia was a challenge, so we have set up a third-party logistics centre in Hong Kong, which has taken a lot of investment and has proven a big distraction,” he says. “It has been quite a large cost to the business but it is absolutely the right thing to do for export. It just might not be the cheapest thing to do.”

Moreover, as cost-efficient as going down the distributor route may be when it comes to exporting, an entrepreneur can often face having to share the rewards with its new partners – this is normally a price worth paying though. “The big decision companies make is whether they do international development direct or through collaboration,” explains Simon Duffy, founder of men’s natural skincare company Bulldog. “We work with distributors, which means they share a lot of the costs and the capital requirements to put you in a place where you can consider a foreign market are much less. But, obviously, you need to be prepared to share the upside of your success because you are working in a team with another company rather than claiming everything for yourself.”

Clearly, then, a move to export is not without expenditure and it’s vital to be on a stable footing beforehand. However, such is the government’s emphasis on SME exports, support is available for the more well-intentioned and credible of small-business owners. Government bodies UK Trade & Investment (UKTI) and UK Export Finance (UKEF) are probably the most reliable first port of call in this regard. Grants of up to £3,000 are on offer to export-hungry entrepreneurs, with additional help available through business community Open To Export, and the Passport To Export service, which assesses a business’s readiness for export and equips it with the necessary tools.

And apparently even our financial institutions are on board with export, at least in the opinion of Harrison, who received the initial funding for his enterprise from one of the ‘big four’ banks. “HSBC has an annual competition and one of the main criteria is being an export-focused business,” he explains. “So I think the bank’s position is evidently that the most stable businesses are the ones that have a meaningful part of their revenue coming from export – and that is not just because it is what the government wants to hear.”

You could almost say the gauntlet has been laid down. The time is very much ripe for exporting and it is hard to ignore the sounds coming from government on the subject. “SMEs should have a bolder approach and think that growth is not only possible, but achievable,” says Anna D’Alessandro, business opportunities manager for UKTI. “Exporting can be financially very rewarding and with emerging markets with a thirst for good quality UK products, we find that SMEs are well placed to fulfil their demand.” As incentives go, they don’t get much stronger than that. 

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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