Could currency depreciation and new trade agreements boost UK exports?

How are small and medium-sized businesses faring in the current export market?

Small- and medium-sized enterprises (SMEs) make up 99.9% of all businesses in the UK. A study by eBay this year found people overseas buy British-made goods and services because of positive perceptions of their quality, a reputation for good customer service, and the familiarity of many British ‘brands’ such as the BBC, pop stars and the Royal Family.

The survey found a quarter of the small business owners that responded have marked an increase in demand from people looking to buy British year-on-year, although a third said they thought Brexit would lead to increased economic protectionism and potentially stifle sales. The Office for National Statistics reports that the UK exported £550bn in goods and services in 2016. However, last year official figures showed only 5%-10% of SMEs engage in exporting their goods and services.

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What are some of the challenges faced by aspiring exporters?

Historically, one of the most significant challenges to exporting SMEs has been the exchange rate. Since the EU referendum Brexit vote however, sterling sank and stayed sunk - a boon to exporters. When the currency is stronger, it can be harder to offer competitive prices to offshore customers who might be able to buy the same goods or services, produced domestically, for cheaper.

Of course, you can’t escape the nature of the specific product on offer. Unique or higher quality products will have less of a hard time and might be more comfortable commanding a premium price tag. A product or service not commonly found in the target country’s market could give you another advantage.

Even in this ultra-connected world, physical proximity is still an issue. This means SMEs looking to export their products can face challenges building relationships with the companies they need to do business with abroad - retailers, distributors and so on. These can be language matters or differing cultural norms, the latter often being less obvious and harder to surmount. This makes having stable, trustworthy connections abroad who can reliably deliver their side of a bargain critically important.

How will Brexit affect exports?

If the downward slide in sterling after the referendum was any indication, Britain’s departure from the EU will mean our pounds will buy fewer dollars, euros and yen once we’re out.

The effects of this will be profound, but two major factors will affect small businesses specifically. First, the cost of importing raw materials will go up if the pound weakens. This means businesses whose materials don’t come from domestic sources will see their margins squeezed or their asking prices forced upwards. However, this could be somewhat countered by your own exports becoming more competitive in foreign marketplaces.

Second is the question surrounding future tariffs on imports and exports, especially to and from the EU. If the UK fails to secure a favourable trade deal with the EU, its largest trading partner, any competitive ground gained by a fall in the pound could be lost again by the cost of doing business abroad. One survey found almost half of EU businesses that do business in the UK are now seeking local suppliers to avoid potential tariffs, and a third of British businesses that use EU suppliers are now looking for alternative suppliers based in the UK.

Will last week's deal make any difference?

The EU's acceptance that the UK has made "sufficient progress" in three key areas – citizens' rights, financial commitments and the Irish border – and can now begin discussions about a future trading relationship had a positive short-term impact on the pound. Having dipped below €1.130 when the deal appeared to fall apart earlier last week, it touched €1.150 after Friday's breakthrough.

However, the Brexit Secretary's subsequent claim that the deal was not legally binding pushed sterling back to €1.132 on Monday.

Longer-term expectations have followed a similar trajectory. The terms of the deal should reassure SMEs that the UK is heading for a smooth and relatively soft Brexit, in which British and EU regulations remain in sync and barriers to trade are kept to a minimum. But they might have had more confidence if the Brexit Secretary hadn't cast doubt on the Government's commitment to the deal it just signed.

What do SMEs need to do?

There are two main areas for improvement when it comes to UK SMEs: innovation and productivity.

Regarding the former, small businesses are often reluctant to gamble on trying something new because of the risks involved - if they invest heavily in something that fails to take off, it could result in the business failing. Other countries provide funded facilities for small businesses to experiment in research and development, but the UK lags behind here, despite research from the Confederation of British Industry saying strengthened supply chains could add £30bn to the UK economy.

The latter factor of productivity is a particular problem: the Bank of England claims a third of UK companies have not seen an increase in productivity since the turn of the millennium. But macro-factors aside, one thing a small would-be exporter simply can’t avoid is the benefit of business relationships offshore. Having reliable contacts in target markets will give you insight, and ease cultural and bureaucratic difficulties that could otherwise be discouraging.

How should small business change their currency strategy to take advantage of the new situation?

Developing a sustainable currency strategy is critical for any business. At OFX we’re working with clients to help them take advantage of the low value of sterling by using a forward exchange contract for overseas sales. A forward contract removes uncertainty with regards to currency fluctuations by locking in a rate upfront for delivery later; up to one year.

This gives businesses a stable currency level to use for planning and budgeting purposes, removing the potentially negative impact that a volatile market could have on costs.

How do other small businesses feel about the new environment?

There’s been a lot of doom and gloom Brexit predictions, but it’s definitely not all bad news for UK SME exporters. In July, OFX commissioned a survey where we went out to 500 SMEs to gauge how they were feeling about Brexit.

Contrary to what some may think, UK SMEs overwhelmingly see Brexit as an opportunity. The majority (63%) of SMEs think their business will either be better off once the UK leaves the EU, or altogether unaffected. Almost three quarters (72%) of businesses that currently trade with the USA believe their business will prosper post Brexit.

Exporters trading with the US have seen the post-referendum weak pound as a boost for business. Sterling denominated goods have been on average 10% cheaper since the vote to leave, which makes this a good time for exporters looking to expand their business in growth markets beyond the bloc.

What advantages and disadvantages do smaller businesses have over larger businesses when it comes to changing business environments like this?

UK SMEs are truly the winners when it comes to Brexit, as they can flex their business strategy, riding the rise and fall of the pound. Unlike larger businesses, SMEs are much more nimble and can respond to currency fluctuations quickly.

When the pound is lower, they can look to dial up exporting. When the pound climbs higher, they can switch their strategic focus to the domestic market. Large businesses simply can’t pivot and shift the same way, which gives UK SMEs a competitive edge during today's environment.

What are some challenges SMEs face in changing their focus from a domestic to an export-led business?

The pound’s fall post Brexit meant sterling denominated goods became at least 10% cheaper to overseas buyers, almost overnight. This created an opportunity for UK SME exporters to exploit and many have done just that.

But beyond the impact of the exchange rate, there’s more to consider in terms of opportunities and threats. Should the UK not sign a trade deal with the EU then goods sold to the bloc will be subjected to tariffs as per World Trade Organisation rules. The extra cost could mean overseas buyers look to source goods elsewhere.

This highlights the need to sign a trade deal with the EU, in order for UK exporters to fully optimise new opportunities created through Brexit.gives insight and eases the cultural and bureaucratic difficulties that could otherwise discourage.

For more information from OFX on currency strategies and other matters, click here