What supply chain finance tells us about Liam Fox’s post-Brexit export strategy
The launch of the UK Government’s Export Strategy to boost British business is very welcome as any focus on boosting the trading fortunes of British business should be.
The report cites that 90% of global economic growth in the next decade is expected to be generated outside of the EU and highlights that the growth of the digital economy and trade in services is making the world more accessible. On this, there can be no argument, and nor can there be on an aspiration for UK exports to represent 35% of GDP on its current 30% level.
The UK Government will help business with online support through its great.gov.uk website, an enhanced brief for the existing missions to facilitate introductions to new markets and for agencies such as the UK Export Finance (UKEF) to provide its continued assistance for those businesses requiring working capital finance to support their export growth.
The Government paper certainly provides more insight and focus on those markets and sectors which are deemed to be areas of opportunity for UK SMEs and mid-market companies and the message is clear that post-Brexit, Britain is well placed to become the international trading powerhouse to rival Germany and other major economies.
However, it should be remembered that, through existing EU trade arrangements, the opportunity for UK companies to trade with these markets by and large already exists and it is not yet clear what new game changing conditions will be in place. UK businesses contemplating entering these new markets in the future must reflect on what has impeded them from doing so in the past and make a judgement as to whether such impediments will be greater or reduced in a post-Brexit world.
Of more immediate relevance to SME and mid-market businesses is how a post-Brexit world will affect their existing business and operations. The Government paper acknowledges that the EU accounts today for 44.5% of the UK export market. A more immediate concern for a UK business, and one which needs to be considered at present, is whether post-Brexit their ability to trade in the markets in which they currently trade and operate is impaired by a need to become re-licensed and/or certificated as such privileges currently afforded in an EU framework may be lost. Moreover, any resultant cost increases may make existing trade agreements and contracts uncompetitive.
The UK government recognises that for many UK SMEs and mid-market companies, the ability to raise additional working capital and a fear of the increased risk in trading with new and unknown markets is a major concern, Many of the Government’s proposed actions are designed to address the fear aspect but it remains to be seen as to whether the existing banks and other funders will step up to the mark with or without the support of UKEF.
The need for additional working capital and risk mitigation is very pertinent as any lengthening of lead times and transit times caused by more extensive customs procedures or any requirement to pay taxes/duties in advance will affect a company’s cash flow. Anything that lengthens the end-to-end trade cycle or accelerates the timing of cash outflows has a direct negative impact on working capital.
Such consideration is also relevant where a company is looking to change its sourcing/ procurement arrangements or wishes to provide different selling terms to its customers. For all the discussion and motivations being presented to increase UK export trade, many of the goods being exported will have some level of overseas component that will have been imported in to the UK.
We frequently work with businesses and their funders to undertake a trade cycle analysis. By following the actual and projected physical and financial flows of their activities, we can assist them in identifying and quantifying those cash flow gaps that will need additional financing support. Post-Brexit this will become an even more essential activity as companies may see a perceived advantage or need to change their existing sourcing arrangements on one side, while also making a change in the sales and payment terms with new and existing customers.
Just like both the UK Government and EU are considering the implications of a post-Brexit world, it will be a sensible step for companies to undertake their own scenario planning and to review existing key relationships so as to assess how they may be affected. For example, if the business has a high dependency on a particular supplier or customer in a given territory, what would a change in trading conditions mean for the business and how much flexibility can it show before the relationship becomes unviable?
As much as the steps being taken as per the Export Strategy document, it would help UK SME’s and mid-market companies if the Government considered providing tax or other financial incentives to assist UK business trading overseas. When mentioned in the past, Government Ministers cited EU regulations that stopped the UK Government undertaking such actions. Yet as we step into a post-Brexit world, it would be an ideal opportunity for the Treasury to investigate this.
Moreover, many of the non-bank and fintech funders struggle to grow their portfolios as they are dependent on relatively high costs of funding which makes their solutions too expensive for many companies. For some, their ability to raise funding is also dependent on having credit insurance in place, with their funders only agreeing to provide funding on a back to back basis up to the levels agreed with the credit insurer. It would be good to see whether through UKEF or some other Government initiative, more support is given to the non-bank fintech community in providing their services to UK business.
By Lionel Taylor and John Bugeja, founders of Trade Advisory Network
Trade Advisory Network is specialist consulting firm in trade and supply chain finance