Operating a business on a local level is a tough job on its own, but branching out internationally is another matter entirely. Expanding into a new country with different regulations and bureaucratic requirements is an enormous headache, and doing so profitably can seem impossible. For UK businesses, the EU provided a more streamlined way to grow beyond British borders, but the world is changing, and Brexit is approaching.
The UK’s economic future is uncertain, and, for many business owners, expanding outward is a good way to hedge their bets. Choosing where to go, however, isn’t always easy. One major factor that has benefited the UK economy in the last year is the exchange rate, but this same issue has made things difficult for businesses hoping to expand out of the country.
The weakening pound holds businesses back
Since the UK’s vote to leave the EU, the value of the pound has declined by approximately 10 per cent against the euro, and stayed at this reduced rate. To foreign investors, this essentially means that they can purchase 10 per cent more British equity for the same amount of euros, dollars, or other currencies that benefited from the weakened pound. This growth in foreign investment has buoyed the UK economy by attracting foreign investment and spurred growth against the expectations of many experts, but it also has had some negative effects for British business owners.
While foreign investors can purchase more British equity with fewer euros, UK businesses are suffering a corresponding penalty in the reverse. To open new branches in European countries, the US, or elsewhere, UK businesses need to invest 10 per cent more to purchase the foreign currency they need. For businesses that are anticipating potential economic difficulties at home, this is a serious problem. Crossing borders is expensive, and coming up with sufficient growth capital is difficult enough even in more favourable circumstances.
Watching exchange rates can reveal important opportunities
Early in February, the value of the US dollar fell by 13 per cent before recovering slightly. For a few days, this brought the exchange rate between the pound and the dollar back to pre-Brexit vote levels for the first time in 2 years. In the short term, this opened a window of opportunity for businesses looking to spend in the US, whether it’s for growth or other kinds of investment.
While these kinds of extreme changes are often temporary, and tend to moderate themselves somewhat over time, it often takes months for rates to return to the old normal. The difficulty for businesses is often not in seeing these opportunities so much as it is in taking advantage of them. After all, business owners can’t afford to hold on to large quantities of liquid capital for months or years while waiting for exchange rates to adjust to their specific needs.
Businesses need to be ready to seize opportunities
To take advantage of an opportunity like the drop in the dollar earlier this month, businesses need to have a flexibly deployable growth plan, and access to sufficient capital. Without these, very few businesses would be able to proceed quickly enough while remaining methodical.
Creating an executable growth plan is primarily just an issue of doing research, building relevant connections, and ensuring that your business is prepared to operate in the environment of the country you intend to expand into. While that’s difficult, it’s mostly a question of taking the time to prepare. Getting access to sufficient capital to quickly invest in such a short time, on the other hand, can present a bigger challenge.
A standby loan allows a borrower to prepare a loan without actually drawing on any funds until needed. The loan is negotiated and approved in advance, allowing the business to withdraw funds at a moment’s notice when they’re needed, instead of scrambling for them when it’s already too late. If the funds are never used, no interest is charged.
Unsecured business loans
Another useful type of loan is an unsecured business loan. Secured loans can take weeks or months to negotiate, making them very ineffective for this kind of rapid fire investment. While unsecured loans tend to be smaller, they can be approved and issued within just a few days.
Other financing options, like invoice financing and supply chain finance, also make it possible for businesses to come up with a relatively large amount of working capital within just a few days. By combining some or all of these tools, businesses can come up with enough capital to take advantage of even a temporarily advantageous exchange rate. With Brexit on the horizon, this kind of strategic growth and cost management may make all the difference for many of the UK’s small businesses.