By Jeremy Cook, Chief Economist at WorldFirst
Recent economic uncertainty has left UK SMEs feeling pessimistic about growth. In fact, our latest Global Trade Barometer, looking at SMEs’ attitudes and behaviours towards international trade, showed that over one million fewer businesses traded internationally in Q3 compared with the same time last year.
This trend looks to continue for the foreseeable future, as seven in ten (70%) expect international trade to decline or remain stagnant in Q4.
With sterling at its weakest level in over a decade, now is the perfect time for small businesses to be expanding internationally and growing their business through exports. However, all data points to the opposite. It begs the question: what are the main reasons preventing SMEs from trading internationally?
Brexit negotiations and central bank movements concerning SMEs
In short, Brexit negotiations and their subsequent impact on currency volatility, in addition to central bank movements, are preventing more SMEs from exporting globally. In our Global Trade Barometer, over two fifths (44%) of SMEs indicated that a lack of progress with Brexit negotiations concerned them. Furthermore, an additional third (33%) worried that the ongoing negotiations would make it increasingly difficult to manage currency volatility in the future.
Once again, political uncertainty is preventing SMEs from fulfilling their potential on the international stage and with the UK government no closer to a Brexit deal, SMEs are pulling back from international trade, probably viewing it as too risky.
Small businesses have also suffered from a double whammy of falling consumer demand and rising inflation which has affected UK trading confidence. In September, the Bank of England first intimated it could increase interest rates for the first time in ten years. WorldFirst hedging data shows a subsequent rush from SMEs locking in stronger sterling exchange rates through hedging contracts. The day after the Bank of England meeting minutes, there were 4.4x hedge trades placed than the Q3 daily average.
The rush to hedge highlights a broad withdrawal of appetite among SMEs for reaching international markets, as many preferred to lock into stronger rates in September rather than gamble on rates further down the line – again indicating that currency volatility is a big concern for SMEs.
Fintech can boost trading confidence
By reducing international trade, SMEs are limiting their growth potential by narrowing their consumer base, which in turn impacts profitability. In a bid to get more SMEs trading internationally, fintech companies are developing innovative products to ease some of the major concerns SMEs have with exporting their goods around the world.
Traditionally, the type of services fintech companies provide have only been available to larger businesses. But fintech-enabled solutions are now filling the service gap for SMEs, who have been neglected by established financial institutions for years.
For example, WorldFirst developed the World Account – an international payments platform which makes the process of international trade cheaper, faster and more efficient. On the platform, businesses can open multiple currency accounts in a few easy steps therefore making it easier to make international payments or receive funds from customers abroad.
By developing products designed to improve international trade, fintech companies can ease many of the macroeconomic concerns facing SMEs when trading overseas, boosting their confidence and ultimately allowing them to focus on growing their business.