Smaller businesses in the UK have become increasingly reluctant to export goods and services over the past decade, new research has found, prompting calls for greater support from both banks and government bodies.

A report published this month by the British Business Bank (BBB) says exports by SMEs accounted for just 32% of the UK’s overall exports in 2018, down from more than 50% in 2008 and 2009.

Produced in partnership with the government’s Departments of Business, Energy and Industrial Strategy (BEIS) and International Trade (DIT), as well as credit agency UK Export Finance (UKEF), the report quizzes over a thousand smaller firms on whether a lack of access to export finance is fuelling that decline.

However, it finds that most SMEs do not believe they lack access to export finance specifically. Instead they report difficulties in gaining financial support from banks more generally, and bemoan a lack of support in handling the risks that come with targeting new markets.

“The evidence shows that supporting SMEs to establish and grow is more important than providing them with better access to finance specifically to support their exports,” the report says. “SMEs are reluctant to take on additional external finance, even if it means accepting a slower growth rate.

“Yet growth is the key to exporting: exporting SMEs tend to have higher revenues and a longer history than non-exporters. Supporting SMEs to grow therefore appears to be the best way of growing SME exports.”

The report follows ambitious UK government plans to increase the share of national GDP that is derived from exports from 30% to 35%, as set out in 2018 by then-prime minister Theresa May.

To meet that target it says authorities “will need to pay special attention to the constraints faced by SMEs, which make up 99% of all registered businesses in the UK, 60% of employment, and 52% of turnover”.

Access to finance

The BBB, a government-owned business development bank, says its findings cast doubt on the “common assumption” that a lack of access to finance is the main constraint to exporting. In terms of taking on export financing in particular, the appetite among SMEs was found to be low.

Part of that is attributed to a lack of awareness. Fewer than half of survey respondents were aware of products designed to increase cash flow or mitigate foreign currency risks, while only 51% knew of services that mitigate the risk of non-payment. The proportion of firms actually using those services was below 5%.

More significant, though, is that 39% of SMEs say they have taken on external finance of some kind but just 8% did so in order to support exporting activities. Survey respondents say they typically borrow “to support general business activity and investment”, with few believing that exporting requires a different approach to financing.

A quarter of firms surveyed that already export products feel they “lack the time or the resources to sell domestically, let alone internationally”, and that figure rises to nearly half for businesses that plan to export but have not yet started to do so.

“These results imply that core financing, which supports SMEs to invest and grow their capacity, is the biggest requirement for businesses which plan to export,” the report says.

For many businesses, that core financing is in short supply. Smaller firms have long complained about the difficulty of obtaining funding from the traditional banking sector, generally on the grounds that lending to SMEs is considered relatively high-risk and low-reward.

“It’s been hard enough for small businesses to get hold of any finance internally, just to survive, let alone to think of doing something more extraordinary like exporting,” says Valeria Mizuno-Turner, co-founder and managing director of Northamptonshire-based Incredible Bakery Company.

“The high street banks don’t like small businesses,” she tells GTR. “It’s a very hard exercise to get any investment to come our way.”

Carl Hunter, CEO of Coltraco Ultrasonics, suggests part of that reluctance may have arisen from the cost of greater due diligence and the requirement for higher liquidity reserve requirements established since 2008’s global financial crisis.

Those changes may be “inhibiting the banks’ inclination to lend”, he says, adding: “Perhaps the banks are challenged to justify the average level of loan that’s at stake in regards to the return that they will make from SMEs.” As a result, initiatives from UKEF – described by Hunter as “an extraordinarily well-led agency by its exceptional leadership team” – are essential but cannot solve the entire problem.

“UKEF obviously cannot force a bank to make export finance available to its clients, and the banks don’t always want to do it to SMEs, perhaps because they consider the values are too small,” he says to GTR. “The fundamental vulnerability on export finance for SMEs is the ease by which they can access it. UKEF plays a vital leadership role but new products for export finance need to be created by lenders too.”

Nurturing and education

For many small businesses, the potential difficulty in accessing external finance – regardless of whether it is supporting their core operations or their exporting activities – can be compounded by the intimidating prospect of selling into a market with different regulatory requirements and consumer habits.

The UK government has embarked on several initiatives designed to combat that uncertainty since publishing its export strategy.

This month alone, the DIT launched a digital tool to provide information on rules and restrictions, tax and duty rates and document requirements for exporting to non-EU markets, and the government embarked on a new “business support campaign” that includes schemes to finance growth within new and existing businesses.

Susie Dorman, owner and creative director at One & Eight, a Devon-based company that specialises in fine metal and porcelain jewellery, says she benefited from a DIT grant enabling her to exhibit at a trade show in New York.

Despite being initially “hesitant or nervous of exporting and the perceived risks to our small business”, Dorman tells GTR that support eased the “daunting” prospect of entering the US market.

However, she acknowledges that opportunity came from a “chance conversation”. Ensuring government support is provided in a systemic way is more challenging.

Mizuno-Turner says the Incredible Bakery Company “would love to export, because we know our product ticks many boxes for many people out there”.

“We have people from all over the world writing to use and saying they’d love to see our products in the Netherlands, France, Spain and so on – but how do I take that chance? It’s too risky,” she says.

“It could help if there was a service where someone is placed in your business to take your hand and show you the way, someone who has that experience – and behind that some kind of finance so you can keep that person ticking the boxes.”

Coltraco’s Hunter adds: “I would say nurturing and education will do more to expand SME exporting than export finance alone. People just don’t realise they are good enough to export. The government’s export strategy rightly tells UK SMEs that if they do they will be 20% more profitable than companies that don’t.”

The BBB report says a lack of appetite among many smaller firms to consider exporting at all is a challenge. Attempts to intervene often mean challenging the beliefs of individual entrepreneurs, and those seeking to provide support may have to target fundamental “behaviour change” before making progress.

Of non-exporting SMEs, it says just 2% cited risk – and none cited access to finance – as potential barriers to expanding sales into new jurisdictions, until prompted as part of the survey.

“These results strongly reject the hypothesis that there is a large pool of potential SME exporters that are only constrained from selling internationally by limited access to finance or high levels of perceived risks,” it says.

“For most businesses, the answer is that they just don’t want to export.”