Where overseas trading is concerned, the recent unpredictability of FX rates has created a challenge for businesses nationwide. Just last October, the sterling hit a 31-year low against the dollar. Even in times of relative stability, the value of sterling is in a constant state of fluctuation against other currencies.
SMEs engaged in all forms of overseas trading need to recognise this reality and develop a FX strategy that protects their margins – fortunately taking control of currency risk is more straightforward than many small businesses realise.
But in the face of this uncertainty, it’s reassuring to see some positive overseas trading trends emerging – and ones that SMEs are perfectly placed to take advantage of.
Recent research American Express conducted in partnership with East & Partners showed a big but untapped opportunity for small businesses looking to start overseas trading. The recent volatility of FX rates are in fact helping as many as nine in ten SME exporters increase their margins – by an average of 16 per cent.
The study also found that 95 per cent of those already exporting are now planning to take advantage of these conditions by boosting exports even further over the next 12 months.
While our research shows that now is a prime time to export, it can be difficult to know where to start. While the key challenges facing SME exporters will depend on the product and markets they are looking to expand in, there are several hard and fast rules that will give businesses the best chance of overseas trading success.
Manage your growth
Expanding abroad is no small feat. The logistics involved will mean spending a considerable amount of time liaising with new customers, providers and regulators – all of this on top of the day-to-day job at home.
While it may seem obvious, one of the first things to consider when deciding to expand abroad is how you will manage this new growth. Companies that don’t, may be taken aback by demand and this could impact the customers’ experience – so make sure your business and hiring plans are aligned to this increase in trade.
Data is an SME’s best friend. Care should be taken to ensure you plan growth activity thoughtfully and back it up with some robust number work. Planning the impact of growth on the business operation is time well invested.
Act global, think local
As well as the logistical and staffing implications of exporting, businesses must also undertake due diligence on demand in new markets.
Understanding the local landscape is imperative: it’s important to understand what the local market looks like in terms of regulation and customer base. While local organisations can give you a head start on this, there’s no substitute for getting to know a new market first hand. Get out there and meet some new contacts in person.
Take the complexity out of payments
Another key challenge for new exporters is around payments. It’s an essential element of business that will underpin all other activity – but its complexity can be a source of considerable confusion. How can you guarantee payment? How will you pay suppliers? And what effect will the volatility of exchange rates have on your bottom line?
Luckily, payments don’t need to be complicated. There is now a wide choice of payment providers who offer as much support as necessary. For many small businesses, who often won’t have a dedicated finance officer or treasury function, choosing a provider who can offer an end-to-end solution will be the most attractive option.
This will help you settle international invoices swiftly and take payments from overseas trading clients with minimal administrative input from the business – leaving you to focus on your core business proposition.
These payment providers can also offer practical information to help devise a hedging strategy that works best for your business – minimising foreign exchange risk and protecting your margins from FX market volatility.
FX Forward Contracts in particular help protect buyers from fluctuations in currency prices. However, our study found that the majority of SMEs (63 per cent) don’t use these contracts to hedge their international payments – with 93 per cent of those citing lack of information as the reason why.
Don’t be put off by uncertainty
Expanding your business abroad is a major milestone for any company. It’s hugely exciting, but can also at times be overwhelming.
However, facing this expansion head-on and fully-prepared will provide the greatest chance of overseas trading success.
By doing your research, working with the right partners, and drawing on the resources available, you can give your business the best chance to succeed – both at home and abroad.
Jose Carvalho is SVP of Global Corporate Payments Europe at American Express