Putting SMEs on the map

Finance - Features

Tuesday, 19 December 2006

Dominique Vaughan Williams of Coface UK explores the different credit management barriers that may inhibit small companies from exporting their goods and services.

International trade presents a number of underlying risks for exporters, from customer insolvency and default to economic and political upheavals. Many larger companies accept this as the essential price for expansion and for accessing new markets. However, the problems of credit management - and particularly collecting payment from overseas trading partners - can appear especially daunting for small businesses.

The UK is currently the world's fourth largest exporter and importer of goods and services. Exports account for nearly 30 per cent of UK GDP and are worth over £268bn per annum. What's more, according to the Office of National Statistics, the UK improved its export performance through the 1990s, with the share of exports of goods and services as a percentage of total supply of goods and services growing steadily from 10.9 per cent in 1992 to a peak of 12.6 per cent in 1996 before falling back slightly to 11.7 per cent in 2001.

SMEs already make a significant contribution to the UK's domestic economy. Of the 1.2 million enterprises (excluding those with no employees) in the UK in 2002, for example, the Office for National Statistics reports that 97 per cent had 1-50 employees and these contributed just over 32 per cent of total turnover. Include medium-sized enterprises (50-249 employees) and this figure rises to over 99 per cent of UK businesses and nearly 50 per cent of total turnover.

However, the type of goods being exported - road vehicles, oil and power generating equipment, for example - indicates that UK exporters are predominantly large companies with the resources to dedicate to sales, administration and credit management. Moreover, a survey produced by the Government's Small Business Service revealed that in Summer 2001, 20 per cent of SMEs (excluding businesses with no employees) exported. This figure had fallen to just 15 per cent in Autumn 2002 (probably due to the economic slowdown). In other words, the vast majority of SMEs are missing the opportunities to exploit new markets and develop their business.

So why do SMEs seem reluctant to consider export? The most common concern relates to getting paid. Longer payment terms are common in many European countries than the usual 30 days in the UK. Thus if late payment occurs, this lengthens an already long settlement time. The average invoice settlement time in the UK is 49 days, compared to 83 in Italy, 73 in Spain, and 65 in France. The problem is inevitably exacerbated during an economic slowdown as companies seek to maximise cash flow (parts of Scandinavia are a notable exception to this rule as late payment legislation has been in force since the 1970s). Even in Germany, where payment performance has historically been good, bad debt temporarily increased in line with bankruptcies that were up 8.5 per cent in the first half of 2003 after rising 16 per cent in 2002.

Added to this is the inevitable reluctance of SMEs to overcome the language barrier and the different business cultures that exist in European countries and elsewhere. In contrast to larger firms, they are unlikely to have the resources to open a local office or employ a native language speaker. Without the confidence of a native language speaker, it can be difficult to communicate different payment terms, not to mention ask for payment from businesses that do not operate on the standard 30-day credit period offered by UK firms. Even companies that have their demand letters translated in advance can quickly come unstuck if the accounts payable department chooses to respond in that language.

Finally, small firms may also be reluctant to take on the administrative burden of handling exchange rates, although at least in Europe the arrival of the euro has limited the impact of this problem. SMEs who export need to be aware of the fluctuating exchange rate and decide whether they want to invoice in sterling or euros and who pays the conversion charges. For those dealing in other currencies, it's a good idea to obtain some form of currency protection that is generally available from banks.

So how should SMEs approach the challenge of exporting, and more importantly ensure they are paid for their goods and services?

Organisation and research

The cardinal rule for SMEs wishing to explore overseas opportunities is to be organised from the outset. It's important to research potential markets and funding by consulting organisations such as the Institute of Export, BusinessLink and banks. Trade shows and the Web also represent useful sources of advice.

All overseas customers - prospects and existing customers - should be thoroughly checked and monitored to ensure they do not represent an unacceptable risk. Financial ratings agencies such as Equifax and Dun and Bradstreet provide detailed company reports and ratings with information on the financial history and strength of individual companies.

A common understanding

When dealing with trading partners overseas it is important that both sides understand and agree a common basis for doing business. In other words, it's essential to have a written agreement outlining obligations, credit terms and payment processes under English Law.

When writing terms of business, SMEs may find it helpful to refer to Incoterms (short for International Commercial Terms), which are standard trade definitions most commonly used in international sales agreements. Their correct use helps to provide some measure of legal certainty and mutual confidence between business partners. Incoterms were introduced in 1936 by the International Chamber of Commerce (ICC) and are available in 32 different languages; commonly used Incoterms include CIF (Cost, Insurance and Freight), DDU (Delivered Duty Unpaid), and CPT (Carriage Paid To). For information on how to use them correctly, exporters should visit the relevant ICC website (www.incoterms.org ).

Protection

Of course, the thorniest issue when tackling international markets is getting paid. Export credit insurance is the best way for SME exporters to protect themselves as they pursue a bolder marketing policy, take on new overseas clients and break into new markets.

Major credit insurers such as Euler Hermes and Atradius offer policies that cover companies against the various short-term risks attached to trading overseas, more commonly within the OECD countries, but increasingly with the higher risk markets in Eastern Europe and the Far East. Export policies will typically protect companies from the effects of currency inconvertibility, the failure of a bank to honour a letter of credit, and the confiscation or nationalisation of overseas plant or equity. It's also worth bearing in mind that many of today's credit insurance policies now represent a complete credit management package, including information about overseas customers and collections services.

For long-term projects with payment terms exceeding two years, credit insurance is primarily provided by Export Credits Guarantee Department (ECGD), which backed nearly £3 billion worth of UK exports during 2003-04.

Collecting payment

For SME exporters, collecting payments in-house is a potential minefield. The most important advice is to have a written company credit policy to ensure internal clarity. Such a policy would need to include detailed guidance throughout the sales process, including negotiating essential checks on customers, raising orders, invoicing and collections. It is also important for credit controllers to be firm about what is expected and when. However they should also be aware of the differences in business culture and, of course, time differences.

For those with little experience of dealing with overseas clients, the best advice is to recognise the limits of your knowledge and be prepared to seek guidance from the experts whenever necessary.

Of course, by outsourcing all or part of their receivables management to a professional collections agency, smaller exporters can focus on their core business issues without the distraction of administering credit control for overseas customers, although it is important to ensure that the agency's collection team has the necessary multilingual expertise, experience and resources to do the job.

Outsourcing should also give exporters increased control over their costs. This is because collections agencies typically charge clients by volume of invoices or size of turnover, so the resources required are easily quantifiable. By contrast, the cost of in-house collections is fixed, regardless of the number of outstanding accounts. If sales are seasonal, outsourcing collections may make even more sense because the resources can easily be switched on and off.

Expanding SME frontiers

By exporting overseas, it could be argued that SMEs are taking a greater risk than larger companies because they are not able to call upon the resources of larger companies.

However, an organised approach, which makes judicious use of the available outside expertise, can work just as effectively. Such an approach has the added benefit of flexibility, enabling the SME to avoid committing significant resources to an overseas venture with no guarantee of success.

There is no reason for SMEs to shy away from opportunities just because they happen to be overseas. Indeed, a clearly thought-out export strategy, properly executed, can really put a small business on the map.

Further Information

Dominique Vaughan Williams is Director of Marketing at Coface UK. For further information about Coface UK's trade credit solutions, call 01923 478111 or visit www.cofaceuk.com