Small and medium-sized enterprises (SMEs) play an increasingly important role in the global economy, with a growing proportion now doing business internationally. This burgeoning overseas trade – not least in Asia – is the inevitable result of globalisation and advances in technology, which have lowered the barriers to trade for even the smallest and youngest companies. Yet, while world markets have become increasingly interconnected, SMEs are yet to benefit from the seamless cross-border banking services typically offered to large corporates.
At Standard Chartered, we are seeing a rapid growth in the number of smaller businesses that are either expanding directly into foreign markets, or sourcing or selling their goods abroad. Trading beyond borders is an obvious way for SMEs to expand their businesses and tap into new pockets of demand and supply. With growing consumption and a rapidly expanding middle class in China and many other markets across the region, Asia has become a popular choice for SMEs looking for faster revenue growth.
A 2011 report by the Economist Intelligence Unit suggested that around half of European SMEs are now active in emerging markets, with a further one-third considering expanding into these markets in the near future. Likewise, the number of Asian SMEs doing cross-border business appears to be growing. Singapore, for example, has seen a 50 per cent increase in the proportion of SMEs citing overseas expansion as a key strategy, according to a 2011 survey by DP Information Group.
As SMEs become increasingly internationalised, their financial needs change. Trading overseas comes with numerous risks, such as managing the quality of goods produced abroad, getting comfortable with new buyers or suppliers in a new market, complying with complex local regulations, managing volatile exchange rates and commodity prices, or accessing the right capital, labour and raw materials. SMEs with insufficient liquidity – including lack of access to debt – may struggle to ensure business continuity in their operations. Others may run into difficulty due to a lack of understanding of foreign markets or because they don’t yet have sufficient size for overseas expansion.
Banking services for cross-border trade – including payments and facilities such as letters of credit – are well established. SMEs have access to a wide variety of solutions from international banks. However, when it comes to direct expansion into foreign markets, banks could do more to support SMEs.
Multinational and large local corporates expanding into new markets have traditionally been well supported by wholesale banks which have global account management models and international networks to ensure that clients experience a seamless service, with cost-effective access to working capital based on a global view of their business.
By contrast, when SMEs expand abroad, they are often faced with building new banking relationships from scratch. SMEs may have a credit history in their home market, but their new bankers will effectively assess their business as an independent start-up. As a result, working capital – if available at all – will be more expensive, impeding the SME’s chances of success. This is compounded by the fact that many SMEs already find it difficult to access sufficient bank funding, not least in the wake of the financial crisis.
With small businesses traditionally served by domestic banks, a cross-border banking framework for SMEs has only recently started to emerge, as regional and international banks have begun to standardise their SME offering across geographies. Establishing a viable, universal banking model for SMEs – similar to that which has proved successful for larger corporates – will take time as banks have to adjust their infrastructure, including credit systems, and ensure that staff have the right training to adequately assess risk and understand cross-border complexities
However, a global account management model for larger SMEs is now paramount. A move to more comprehensive cross-border banking services for SMEs should be part of a fundamental shift in the relationship between banks and smaller businesses–from one focused purely on transactions to one where the bank becomes a trusted partner and advisor. It should not merely be a change in business proposition, but a change in mindset when it comes to supporting SMEs.
The point is, SMEs should not have to start all over in their banking relationship when expanding into foreign markets. Rather, services should be seamless based on a global view of the SME’s business and credit history. Essentially, this is about banking catching up with the way SMEs are now operating in the global marketplace.
The crucial role of SMEs as generators of jobs and growth in economies is well established. The banking industry should now be playing its part in providing the right kind of international support to allow these important businesses and global trade to flourish.
The author is Global Head of SME Banking, Standard Chartered Bank