Exporting: Why and how?
Exporting overseas can provide great benefits to your business, not least increasing your revenue and profitability and diversifying the risk of trading with one country. Understand why you might want to start exporting your goods and services, how to get started and the potential risks you need to be aware of.
The increasing globalisation of markets and ongoing opportunities provided by digitisation have supported many decisions to export goods and services. Exporting can be an opportunity to:
- Increase your revenue and profitability by expanding your business.
- Shield you from fluctuations in your domestic market. A downturn in one country’s or even one continent's economy isn’t always repeated worldwide. And the more dispersed your customer base is, the better.
- Smooth out your annual workflow. Businesses that focus in one product area may experience seasonality in sales. But this effect can be lessened by widening your market. For example, turnover from selling your summer-friendly products in hotter climates during the winter season at home.
- Stimulate fresh demand for your product. A product with moderate sales in the UK may prove to be a great success elsewhere. See more on choosing an export market.
There are two areas to investigate before deciding whether your business is right for exporting. The first deals with factors specific to your own company and its current circumstances; the second looks at more general factors relating to your industry’s position in the international marketplace.
Ask yourself some questions about your business:
- Do you have the necessary financial reserves to develop your export market potential or are you able to access funding and support from your bank?
- Are you already receiving a high number of overseas enquiries about your product? This can suggest potential demand.
- Are your production capacity and human resources able to meet the increase in demand that international trading may bring?
- Do you know where you can access the necessary skills and knowledge?
- Does your product meet the required overseas regulations and standards? Ask yourself the following questions about your industry:
- Is your product already being exported by other UK companies?
- Do any of your trade association reports recommend exporting?
- Are similar products to yours being imported from overseas for sale in the UK?
To help see whether your business is ready for exporting – and what you need to do to get there, download our flowchart (PDF, 109KB). It will help with your decision-making process to understand the opportunity and the key considerations.
If you're not sure about some of the answers, you can get help from our International Trade Portal. It can also help you explore your market potential and build on your research. Planning an effective export strategy that complements your overall business plan is important, particularly if you are seeking outside finance to support your expansion. A commitment to exporting must be evident throughout your company and your vision should have a truly international perspective.
Ultimately, only you can make the final decision about your suitability or readiness for exporting, but there is plenty of guidance available to help you reach that decision. The Department for International Trade (DIT) provides a range of diagnostic tools and a wealth of information to help you decide whether exporting is right for your business.
There are a number of ways you can get into new markets. Which is the right method for your company will depend on your products, the markets you are entering and your own circumstances. Some of the most common options include:
Exporting from your UK base
This involves manufacturing your products in the UK and then shipping them overseas. This approach is scalable and works well if you want to trade with multiple markets.
Using an overseas sales base
If you are making a significant commitment to one country or area where sales are very high, it may be worth establishing an overseas sales base. This can help lower costs, increase your market penetration and help you to comply with government regulations. Most countries will have government-backed economic development organisations to help companies setting up a more permanent base in the local market.
Using licence agreements
In this situation, a local business produces and sells your product under licence, and on your behalf. Licence agreements are often used when there appears to be no other way of making profitable returns from an area. For instance, many developing countries insist on the highest possible level of local manufacture as this represents the best long-term commitment to the region.
Using overseas agents/distributors
Using a retail or distribution specialist in your product or service area can mean that they take on a good deal of the overseas legwork and can be a good way of testing the market before making a bigger commitment like setting up an overseas base. It’s important to draw up pre-agreed contracts, which clearly define the division of responsibilities and the channels of communication between you. The success of a distributor is often directly correlated to their commitment to their particular product.
Be aware of your agent or distributor’s other commitments and spend a good deal of time making sure they understand and appreciate the specific benefits of your product or service.
Understanding potential exporting risks will help you mitigate them. Risk falls into a number of key areas.
Your product must comply with all the relevant regulations and standards that apply to the countries you are exporting to. You might choose to introduce changes yourself – such as cheaper materials for different marketplaces. Remember that product modifications will affect your production processes, and your budget.
Exporting may lead to changes in the way you manufacture and supply your product. When transferring manufacturing overseas or granting an overseas licence that includes production, you’ll need to keep a close eye on maintaining standards. Always ensure that your designer's specifications are strictly adhered to. You’ll also need to take steps to protect your intellectual property (IP) rights overseas, which can be complex as IP rights are territorial.
If you are exporting to countries with different languages, your product packaging, advertising, literature and point-of-sale material will all need to be re-designed. You could also need to review your marketing materials for cultural differences, even in other English-speaking countries. For example, if your advertising relies on a very British sense of humour, the American market may not always respond to it in the same way.
A key risk for you, as an exporter, is that a customer will fail to pay promptly (or at all). It is vital you protect yourself against this.
Here are some of the measures you can take:
- Insure yourself against non-payment - you can insure against non-payment of export invoices with a specialist provider, or by arranging for your bank to take over the risk. For example, discounting your export sales ledger. However, this is usually an ongoing arrangement rather than being done on a one-off basis.
- Try to negotiate payment upfront - consider negotiating payment upfront if you have the slightest concern over your potential customers' ability to pay. If it’s a big project you are working on, ask for stage payments.
- Ask for a Letter of Credit from the customer's bank - this effectively means their bank guarantees the payment. Be aware, however, that discrepancies in the correct documentation can result in letters of credit being rejected when first presented to a bank.
- Consult the British Chambers of Commerce - if you require further reassurance on a customer's financial security, they can help trace companies in the UK and worldwide. They can also conduct press searches on companies or individuals, for a small fee, and can provide credit ratings or in-depth financial accounts for a UK or international company.
- Ask your suppliers for extended terms - extended terms can help while you are developing demand from overseas and establishing a trading pattern.
- Take advice about what is normal for the markets you move into - for example, some nations are more likely to operate on an open account basis, whereas others tend to use letters of credit. As far as possible, protect yourself in any pre-agreed partnership contracts.
- Investigate the UK Export Finance Schemes - these were introduced in 2011 to provide additional support for exporters. You can find out more at UK Export Finance. If you are in any doubt, you should seek professional guidance to help you manage your credit. The Department for International Trade can point you in the right direction, or speak to your bank.
Exchange rate risk
The profitability of your export orders can be affected by fluctuations in currency exchange rates.
To protect yourself against this, you can match income received in a particular currency to your expenditure in that currency, to offset any adverse financial implications. This could however incur additional costs so it’s always worth speaking to your bank to identify the most appropriate foreign exchange solution for you.
UK Export Finance can advise you as to where to get help with managing your exporting finances. For more information on how Bank of Scotland can support with foreign exchange and your interest rate risk visit our International pages.
CHANGES IN THE EXCHANGE RATE MAY INCREASE THE STERLING EQUIVALENT OF YOUR DEBT. All enquiries for foreign currency accounts will be referred to a specialist manager who will provide more information about charges for these services upon request.
Mastering international trade procedures will be key to maintaining a successful export operation. You may need to invest in both specialist training and computer software, to aid your management of international trading (and payment) processes. Exactly what you are exporting and where it is going will determine the kind of procedures you need to have in place, but these will normally include:
1) Export documentation
Chambers of Commerce offer advice and training courses on paperwork for the movement of goods. Certificates of origin are often required to meet customs and quota requirements in the importing country. The Chambers of Commerce are the designated authority for the issue of EU certificates of origin, which will continue to be used until the end of the Brexit transition period on 1 January 2021. The service is open to all businesses in the UK, at a reasonable cost, and there are beneficial rates for Chamber members.
Organising the physical movement of your goods will play a key role in your export operations. First-time exporters can discuss their plans with their local Chambers, to make sure the mode of transport and packing is best suited to your product, and to check that you haven't missed anything. A forwarding agent can also give you help with the packing and shipping of your goods. Although there is no legal obligation to do so, it is generally advisable to get your goods insured. Marine insurance is the general term used to describe cover against damage to goods and loss while in transit. Policies will also cover road, rail and air freight. Any shipments you send out should conform to the Incoterms, a set of internationally recognised set of instructions used in the global transportation of goods.
Our International Trade Portal can help you manage your shipment, understand trade customs and calculate the cost of exporting.
The export of certain types of goods and technology is administered by governments, primarily to control the transfer of arms. This includes many items designed for civil use but termed 'dual-use', because they could be used for military purposes. These include:
- machine tools
- electronic equipment
- telecommunication equipment
- related components and spare parts.
Exporting and Brexit
From 1 January 2021 when the Brexit transition period ends, the processes for exporting to EU countries will change. The end of the transition period might also affect trading with non-EU countries.
HMRC business guidance - explore quick and accessible content via webinars, e-learning tools and videos
Bank of Scotland International Trade Portal – a valuable online resource available free to all UK businesses at every stage of the trade lifecycle, from researching your first overseas venture to helping evaluate your current trading strategy.
Bank of Scotland Bank International – get the support you need to expand internationally from foreign exchange to International payments
While all reasonable care has been taken to ensure that the information in this guide is correct, no liability is accepted by Bank of Scotland for any loss or damage caused to any person relying on any statement or omission in this business guide. This guide is provided for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each instance. When using these services your agreement will be with the relevant third party and their terms and conditions will apply.