EXPANDING overseas is hard enough for any firm, but small and medium-sized enterprises (SMEs) need to pay special attention to the pitfalls that might jeopardise their efforts.
Ms Tan Siew Meng, HSBC's head of commercial banking, said SMEs should consider the new market's risks and the challenges of operating in an unfamiliar economy and environment.
That means a deep understanding of the country is essential. This includes knowledge of laws and business regulations, social and cultural norms, and traits that define the place.
Ms Tan said: 'This can often be very challenging for SME owners who are usually too preoccupied with their day-to-day operations.'
She singles out some must-do guidelines for any company looking to expand overseas:
Make management of money a priority
'Bad cash flow management can cripple a good business model,' said Ms Tan.
A good method is to outsource and automate back-end resources and functions. Automated solutions will enable SMEs to concentrate on doing their business well.
Many SMEs venturing overseas face problems managing their cash flow across different bank accounts in different countries, so it is important to select a bank that has global payment and cash management capabilities.
'Determining your payment strategy is an art and a science - an art in negotiating with suppliers for the best payment terms, and a science in choosing the best payment method,' said Ms Tan.
There are various choices available for making payments, including autopay, telegraphic transfers, demand drafts and credit cards.
Harness the power of the Internet
'The most powerful tool available to SMEs to manage their overseas businesses is the Internet, which can simplify the complexities of cross-border transactions,' said Ms Tan.
Internet transactions can be viewed in real time, enabling easy tracking of money movements.
Build a team of experts in the country
Competent advisers familiar with the country an SME is investing in are vital in steering the firm in the right direction.
The firm will need people who can provide advice on terms of trade, methods of payment and receipt of funds in order to optimise its working capital.
SMEs could pull together a team of advisers in each country, or work with a global banking partner with experts there.
Make sure others pay and deliver
SMEs must ensure that they are paid or that they get the goods they purchased. For example, when dealing with buyers in developing countries, it is common for exporters to request Documentary Letters of Credit (DC).
In a DC, the issuing bank undertakes to make payment for goods or services provided by the supplier within a prescribed time limit and against stipulated documents.
'DCs issued by an unknown bank or coming from higher risk countries can present uncertainties. So when you receive a DC as a payment instrument, it is essential to check that the issuing bank is financially stable, particularly if shipments are going to less familiar markets,' said Ms Tan.
Consider short-term financing options
Long-term financing usually involves a fixed repayment against a mortgage, while short-term loans involve flexible repayment on-demand.
Long-term options include property and equipment loans.
Most SMEs manage their long- term debts well, said Ms Tan, but there appears to be less awareness of short-term loans among SMEs.
Options include trade financing and the various loan schemes on offer by banks, many of which are innovative and flexible.
Operations can be held back while waiting for customers to pay. If SMEs need working capital, banks can provide a cash advance against an expected payment from the buyer. When the bill is paid, the bank keeps the proceeds to pay off the loan.
'This way, SMEs can improve their cash flow and reinvest funds in their business before receiving payment from their sales,' said Ms Tan.
CHOOSE THE BEST STRATEGY
'Determining your payment strategy is an art and a science - an art in negotiating with suppliers for the best payment terms, and a science in choosing the best payment method.'
MS TAN SIEW MENG, HSBC's head of commercial banking, on cash flow management being a priority
POPULAR INVESTMENT DESTINATIONS
China
CHINA holds much promise for Singapore companies willing to take a chance. It has recorded growth of more than 10 per cent a year over the past four years, thanks to trade liberalisation and economic reform.
Singapore businesses may benefit from the free trade agreement being negotiated with China.
The deal is envisaged to be a comprehensive one, extending beyond trade in goods and services and investment to encompass cooperation initiatives in various areas.
However, China's transformation is not yet complete. Investors still face many obstacles, including concerns over the country's customs procedures, import restrictions, anti-dumping measures, foreign investment curbs and exchange rate policy.
Vietnam
WITH a population of 85 million, Vietnam is Asia's sixth most populous nation and Asean's second most populous after Indonesia.
Entry into the World Trade Organisation in the last year encouraged economic changes, with Vietnam working hard to attract foreign investment and improve the nation's infrastructure.
The government is pro-business, but is struggling to get the country's double-digit inflation under control.
Its economy is still predominantly cash-based with the Vietnamese dong, United States dollar and even gold used to make major purchases.
Vietnam has one of the youngest and best educated workforces in Asia.
Currently, 70 per cent of the population is under 40 years of age and 57 per cent is under 25. The literacy rate is at a high 94 per cent.
India
INDIA has the world's second-largest population and one of the fastest growing economies.
The boom has continued at an accelerated pace, especially in industries such as manufacturing, construction, mining and services.
While traditional industries like agriculture have declined in importance, new sectors like car component production and generic drug manufacturing have risen rapidly.
And while the Indian economy is increasingly more open and export-driven, there is also the potential of the growing middle class.
Surveys estimate that 100 million people now live in households with annual incomes of between 200,000 rupees and one million rupees (S$6,420 and S$32,100), up from just 15 million people between 1990 and 1991.
This growing middle class is expected to drive growth in domestic consumption.
Middle East
INCREASINGLY, the Middle East is viewed as an attractive option by Singapore companies seeking to serve the region's fast-growing markets.
Its economy has diversified into non-oil sectors, including tourism, manufacturing and services.
Governments such as those of Qatar, Oman and the United Arab Emirates (UAE) are encouraging private-
sector expansion and have liberalised business policies to attract foreign trade.
Singapore is currently negotiating a free trade agreement with the Gulf Cooperation Council (GCC).
The GCC comprises six member states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
Together, the group represents Singapore's seventh-largest trading partner.
This article was first published in The Straits Times on Jun 18, 2008
