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SME growth in unstable times

Many small UK companies remain optimistic, despite the chaos surrounding Brexit. Instead of feeling despondent, they are using technology and innovation to navigate the uncertainty and seek new opportunities.

Brexit is a challenge – 90 per cent of small and medium-​sized enterprises (SMEs) see it as such, according to a January report by asset-​based lender Independent Growth Finance (IGF). Some SMEs will be vulnerable to the uncertainty it brings, but with challenge comes opportunity – and many nimble SMEs are best placed to take advantage.

This is why 27 per cent of SMEs expect their revenues to grow by more than 10 per cent in 2019, says IGF; and why 69 per cent expect some increase in revenues, with 71 per cent seeking new funding this year to fuel growth.

This investment will pay for technology (37 per cent), staff retention (30 per cent) and marketing (27 per cent) – a clear indication of how companies are investing to help beat Brexit-​related uncertainty.

There are many factors embedded in the relationship with the EU that will be hard to counteract after Brexit

Rupert Lee-​Browne, chairman and chief executive, Caxton FX

Professional services firm Smith & Williamson’s Enterprise Index also dispels the myth that Brexit will cripple small businesses.

It showed that, regardless of the persistently worrying headlines about Brexit, business confidence was actually growing. In the second half of last year, 82 per cent of businesses expected their prospects to improve in the next 12 months, compared to 59 per cent in the first half of last year. And, despite the unpredictability around Brexit and trade, 82 per cent expected turnover from overseas growth to increase in the next 12 months – a figure that’s nearly double that of six months earlier.

Also, even though there has been a lot of talk about losing talent in the run up to Brexit, 87 per cent of companies said they had access to the talent they need, compared to 76 per cent six months earlier, and 84 per cent expect to increase headcount this year.

SMEs are using a range of innovations to navigate the challenges of Brexit. One of the biggest short-​term risks is the ongoing foreign exchange (FX) volatility caused by Britain’s plan to leave the EU. But there are a wide variety of tools and technologies available to help mitigate this, and even turn it to your advantage.

FX rates can be sensitive and prone to large, short-​term swings in an uncertain environment. This could cost an SME thousands of pounds if it makes a large international transaction on a day when the rate swings against it.

It can also impact the cost of travel. To avoid FX volatility affecting business trips, UK companies can use rate notification services to buy currency whenever the pound is up. Using a multi-​currency account and payment card allows them to preload with other currencies when the rate suits them.

Then there are international payments services, which often give better FX rates than banks, and can also provide personalised rates. Such services can offer an independent currency analyst to advise on the workings of international FX markets and how different products and scenarios will affect payments over different periods. The analyst can also explain local tax regimes.

SMEs have access to a range of financial tools to help mitigate currency risk. Limit orders make a trade when the exchange rate hits a predetermined level, while hedging contracts protect against adverse currency movements by setting an option to exchange at a future date. These can come in several varieties depending on a company’s needs.

Similar options and advice are available to those who need to repatriate funds in preparation for Brexit, or for those who need to reduce the risk of FX volatility on regular payments to the EU.

Rupert Lee-​Browne, chairman and chief executive at international payments firm Caxton FX, says: “There are many factors embedded in the relationship with the EU that will be hard to counteract after Brexit. For example, if a small business sends a payment to its supplier in France, the French bank that receives the money currently works under the EU’s single euro payments area (SEPA) rules, which, for UK customers, enables free transfers under €50,000.

“But if we crash out with no deal, SEPA would likely no longer apply and the French bank would be entitled to put a big charge on the payment and potentially slow it down. The French supplier might then not release the goods because they are not getting paid properly. This is just one simple part of a supply chain.

“But an account with an international payments service would not apply such a charge. Opening a foreign bank account takes months – but you can open an FX company account in 24 hours and start paying in and out quickly, using it as a de facto bank.”

Brexit is adding stress to the already difficult relationship between many SMEs and traditional banks. IGF says Brexit-​related uncertainty has made financial backers increasingly cautious – 53 per cent of businesses had to wait at least a month for a funding decision in 2018, and 31 per cent waited three months or more. Since inability to forecast is among the top Brexit-​related challenges, slow funding could cause irreparable damage to businesses.

Smith & Williamson adds that there was a fall in the number of firms receiving loans from banks between 2017 and 2018.

However, its data also shows that alternative finance models are stepping in to lend where banks have refused. 72 per cent of companies think access to funding has actually improved in the past 12 months as they move to new forms of financing such as funding contests and crowdfunding.

Entrepreneurs are increasingly willing to use this funding to grow as their appetite for borrowing is double what it was a year ago, says the firm.

Smith & Williamson says sentiment may worsen in the event of a no-​deal Brexit. But there is little sign of the tide turning for entrepreneurs so far. With uncertainty on the horizon, SMEs are refusing to stand still. Instead, they are pushing for ambitious growth and alternative funding solutions.

IGF says many businesses are open to changing their funding provider in order to take advantage of quick and flexible decision-​making. While traditional bank funding remains the top source of finance (67 per cent), 27 per cent now use invoice financing and 22 per cent opt for asset-​based lending.

Jon Hughes, commercial director of IGF, says there are some good funding solutions available to help SMEs face the challenges of Brexit. “Asset-​based lending generates more cash for working capital compared to other types of finance,” he says. “This will help businesses who are holding more stock than usual in preparation for Brexit [in case it leads to border delays, for example]. Or, in manufacturing businesses, it could be useful if parts of their supply chain don’t work and companies face a build-​up of work in progress.

“Asset-​based finance is also particularly helpful as the working capital cycle has become more tightly controlled than ever, due to the development of practices such as just-​in-​time production.”

Though forced into it by a challenging environment, alternative finance might also help SMEs become more competitive and grow in the future, adds Mr Hughes.

At times of stress, it is crucial for SMEs to have a good handle on their credit position as getting the best credit terms possible can affect their prospects significantly.

Credit reference agencies are now able to access lending data from the larger banks, increasing transparency. This means SMEs can understand how their credit score is determined and how they can improve it, helping them to access finance and grow at the right moment.

Linked to this, technology consultancy Capco has identified several challenges that firms such as financial services providers will face as a result of Brexit. It has also come up with some potential solutions.

Some firms are opening new EU entities or expanding existing ones to ensure consistency of service after Brexit, but this is an expensive strategy. Firms will need to engage credit rating agencies to secure their credit ratings, says Capco.

It says that managing capital, liquidity and collateral across more jurisdictions will require careful monitoring, planning and execution to avoid expensive and inefficient allocations.

Companies should also look for efficiencies wherever possible to reduce costs and potential for errors. Client segmentation profitability analysis and other innovative cost-​cutting strategies – such as automated onboarding, offboarding and repapering activities – could help, says Capco.

A major, potentially uncontrollable, risk posed by Brexit is losing EU customers because they find it more expensive and more onerous to trade with the UK, and to be based here.

Having a broad and diverse customer base is a crucial way to mitigate such risks and some UK SMEs are therefore ramping up marketing activities around the world as a proactive countermeasure. Technology is making it easier to do this, through a range of sophisticated data and analytical marketing tools.

These can drive a wide range of applications – just one example being real-​time “trigger alerts” in which data providers scour millions of websites and social media channels every day to alert an SME of an event that triggers a need for their services. For example, if a company is opening a new subsidiary in Poland, this may trigger a need for haulage services or foreign payment solutions. The triggers enable an SME to take marketing action before its competitors.

Investing in innovations now should help SMEs survive Brexit and support growth and prosperity in the future

It is not just customers that will be affected. Disruptions to procurement and supply chains are another major potential source of Brexit-​related risk. Digital technology can help companies monitor and manage their Brexit-​related procurement risk by using robust vendor master databases, and accurate, relevant, timely data about spending plans, suppliers and contracts.

There is also a risk if all your customers are in the UK. Uncertainty has caused nearly half of managers to be pessimistic about the UK economy for 2019, according to a survey by the Chartered Management Institute (CMI).

CMI head of policy Rob Wall says the key to countering this is to improve productivity through better management practice – not just in traditional industries such as engineering and manufacturing, but in all sectors.

“The people, project and change management skills that professionally qualified managers bring make a clear case in the post-​Brexit landscape for investing in management development,” says Mr Wall.

“Expanding into new markets can provide great opportunities, but also pose challenges. The key to success is often down to building a team of talented people, with the right sets of skills and knowledge. This includes good management skills, which are key to boosting productivity, improving performance, and attracting and retaining talent.”

Talent management is a major challenge – the Chartered Institute of Personnel and Development (CIPD) shows that three-​fifths of organisations say Brexit will make it harder for them to recruit senior and skilled technical employees.

Solutions include upskilling existing staff where possible, maximising local resources, and upgrading benefits and staff communication. Again, there are tools available to help. For example, total reward statements will allow staff to understand and therefore place more value on the benefits they receive. Meanwhile, comprehensive benefits platforms with jargon-​free communications should help employees by giving information about which core or voluntary benefits meet their needs, and what other resources are available.

Investing in such innovations now should help SMEs survive Brexit and support growth and prosperity in the future.

There is plenty of potential for them to go further though, according to research by data and analysis firm Dun & Bradstreet. It reveals that many SMEs do not use (and don’t plan to use) business intelligence (48 per cent), enterprise resource planning (48 per cent), and customer relationship management (37 per cent) tools that could enhance their sales, HR and overall business strategies.

Given that 56 per cent of business leaders believe technology could enable their business to generate more revenue, this will be an essential area of development in coming years, says the firm.

Investing in technology to support data analysis on talent retention, and on finding potential new suppliers, markets and customers, will be crucial to future success as the UK’s role in the global economy evolves.

Harnessing post-​Brexit opportunity: top tips for SMEs

  • Invest in technology, staff retention and marketing to keep your edge
  • Look into alternative financing models to fund future growth
  • Use international payment services to avoid currency risk
  • Diversify geographically and explore markets outside the EU
  • Explore new tools such as profitability analysis and marketing platforms