Companies in the plastics sector are recognising that in order to maintain growth and competitiveness they need to reach out to markets abroad. For those companies that have yet to consider global expansion, the recent fall in the pound presents an opportunity to be more competitive. And although businesses may be concerned about maintaining their cash flow, export finance can provide the solution as Ian Cole, Head of Invoice Finance - UK Sales, Siemens Financial Services explains.
The latest survey by the British Plastics Federation (BPF) of its members shows that almost 40 percent (39.9 percent) expect to export more over the next 12 months, a significant increase compared to the previous survey (28 percent).
Approximately half (51.5 percent) said they expected their export levels to remain stagnant and only 9.09 percent said their exports would decrease.[1] This means that those companies not yet exporting are by far in the minority within the plastics sector.
export finance
Companies in the plastics sector are nevertheless facing a number of key challenges. When asked about their predicted sales turnover for the next 12 months, almost a third (32.5 percent) said they didn’t expect to see any change and 16.25 percent said they expected to see a decrease. At the same time, almost 80 percent (78.94 percent) expect their profits margin to reduce or stay the same due to the expected rising cost of raw materials and exchange rates.
Despite this, companies are under pressure to invest: 23.68 percent of respondents said they planned to invest ‘significantly’ in plant and equipment over the next 12 months and 63.16 percent said they plan to invest a ‘little’.[2] Viewed overall, this suggests that sales turnover and profits are unlikely to fulfil the need to keep up with investment pressures.
For those companies that aren’t already exporting, the recent fall in the value of the pound[3] means the timing to reach overseas customers will rarely be better. It means that UK manufacturers’ products become cheaper for foreign customers to buy and therefore UK exporters are more competitive.
Shunning global opportunities?
So what are the arguments for shunning global opportunities and concentrating on domestic markets? For many companies, the perceived complications of securing and working with new customers based in other countries can be off-putting. Initial obstacles include the length of time involved in establishing new business, additional travel and other associated upfront costs; all putting a strain on working capital. So it’s no surprise that access to working capital or cash-flow funding is a primary concern often raised.[4]
Export finance is one method of alleviating the working capital concern that’s rapidly gaining popularity. Members of the Asset Based Finance Association (ABFA) reported that in the quarter ending in September 2015 they provided 42 percent more in export factoring to customers, than in the same quarter the previous year.[5]
Export finance is essentially invoice finance applied to invoices issued to customers overseas. With invoice finance, when a company invoices their customers, up to 90 percent of the approved invoice total is straightaway advanced by the finance provider, with the remaining 10 percent paid once the customers settle the balance. This provides the company with essential working capital so it can then invest in expanding its business without having to wait for bills to be paid. Export finance is very similar, except it relates to invoices sent to customers located abroad, and the amount is advanced in the relevant currency relating to the invoice.
Despite the advantages of the low pound versus other currencies, plastics companies might consider that a relatively volatile political and economic climate may not be the right time to embark on global expansion.
Research shows that the majority will have been disappointed by the EU referendum result. Before Brexit, eight percent of BPF members felt the UK should leave the EU while 62 percent said that the UK should remain in the EU as currently constituted. Similarly, when members were asked about any special factors affecting their sales turnover predictions, over half cited the anticipated detrimental impact of Brexit.[6]
Embarking on an export strategy
Working with the right financier, however, can enable plastics companies to more confidently embark on an export strategy despite a changing economic and political landscape. International financiers with proven experience in global markets will be well-positioned to support customers through such changes. Similarly, leading export finance providers which have a global footprint can utilise worldwide knowledge, experience and presence to assist clients with various exporting challenges and provide on the ground assistance through expansive networks of offices in leading markets.
A good export finance provider will also offer debtor protection, which effectively insures the business against the risk of debtors failing to pay. It can cover up to 90 percent of outstanding debts and include goods not yet invoiced or services not yet rendered. Many businesses find debtor protection provides peace of mind, particularly when dealing with new or unfamiliar customers and those based outside of the UK.
With a need to increase investment and profit margins shrinking, companies in the plastics sector are being forced to re-evaluate their business strategies. Many are already exporting and looking for ways to increase their global presence, meaning those that have yet to do so risk being left behind. The falling pound and the resulting competitiveness of UK exporters, presents the ideal opportunity for businesses considering the export opportunities. Export finance is an important tool for any company looking to expand outside of the UK. The current political and economic climate need not act as a deterrent. By working with the right financier, firms can reach out to customers abroad safe in the knowledge that their cash flow is maintained and they are protected against potential losses.
References:
[1] British Plastic Federation, Business Conditions Survey for the UK Plastics Industry Conducted June/July 2016
[2] British Plastic Federation, Business Conditions Survey for the UK Plastics Industry Conducted June/July 2016
[3] BBC News, ‘Brexit: Who is affected by the falling pound?’, 29 June 2016
[4] OECD, CFE/SME(2012(6/FINAL, Fostering SMEs Participation in Global Markets: Final Report, 4 July 2013
[5] Asset Based Finance Association (AFBA), Quarterly Statistics to September 2015
[6] British Plastic Federation, Business Conditions Survey for the UK Plastics Industry Conducted June/July 2016