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Foreign markets are also accessible to the small

2018-07-04

Lithuanian exports are gaining momentum: trade volumes are increasing, the geography of foreign markets is expanding. Justas Čapskis, Project Manager of Šiaulių Bankas Financing Service Development Department, advises how small and medium-sized businesses (SMEs) go to foreign markets and what financial decisions they can take.

Jump up in all directions

Over the past few years, Lithuania's export performance has grown rapidly: just in the last year, compared with 2016, exports grew by 16.9%, to 26.4 billion euros. Although this year, due to the effect of the comparative base, export growth will slow down, it will remain strong, with projections from different sources reaching about 6%. In 2017 exports of all commodity groups grew: in particular, vehicles (compared with 2016, increased by 37.2%), metals and metal products (31%), machinery and equipment (25.9%), mineral products (22.7%). Exports of services are distinguished by extremely high growth rates: particularly good indicators are demonstrated by road freight companies, the results of the tourism sector are also improving the service export statistics.

“Already by following the market news, we see that opportunities for exports to grow further in the future increase in number. For example, in the Free Economic Zone of Kaunas, automotive part and component companies are investing, so in the long run we will see steady growth in the export performance of the machinery and equipment sector. A furniture industry cluster is being created, whose successful activities will also have a major impact on the export performance of the furniture sector. We see that foreign partners are increasingly relying on Lithuanian metal processing companies: foreign customers are attracted by high quality metal products from the Lithuanian companies”, says J. Čapskis.

Today, the European Union, Lithuania's largest export partner, accounts for almost 60% of the country's total exports: in 2017 exports to the EU increased by 12.2%. In addition, last year, exports to non-EU countries, such as Russia (29.3%), Ukraine (20.9%), and Belarus (15.6%) increased sharply.

“Lithuanian businessmen often look at countries of higher risk, such as those in Africa, Eastern Europe. These markets are characterized by higher margins, but our exporters are worried about the risk of settlement or cannot provide sufficient quantities of production. In foreign markets, Lithuanian lasers are especially valued: it is the product of high added value. True, this is not a consumer products that would significantly affect the export performance of the country”, said the interlocutor.

Where to start?

The big companies have a lot of experience working in foreign markets, but according to research, only a quarter of all SMEs in the European Union are determined to test their forces and their output in foreign markets, while even less percentage tries to enter the non-EU countries. How to start for the small and medium-sized businesses?

“First of all, foreign markets can not be entered into “blindly”: it's important to know the local market situation, the competitive environment, customer expectations, to understand the distinctive nature of your product or service, as well as to know the legal environment, consumer habits and many other important nuances”, names the financial expert.

According to J. Čapskis, a reliable way to start an export business is to use a business partner who thoroughly understands the specifics of foreign markets and is able to help building relationships with potential business partners.

“If the company sees long-term potential in the foreign markets, it's worthwhile to hire an experienced specialist who would be responsible for expansion in foreign markets: entered into a partnership with potential customers, analyzed the situation on the local markets”, J. Čapskis thinks.

No less attractive is another way to introduce your services and products in the new markets: the exhibitions.

“During specialized exhibitions and business fairs, it is possible to present your products, to establish direct relations with potential partners. It is true that in order to attract potential partners or clients, SMEs need to invest a lot in the exhibition stand”, warns J. Čapskis. If there are no such funds in the budget, foreign markets can be penetrated using the help of Versli Lietuva consultants, in cooperation with Lithuanian representations in foreign countries, taking advantage of the opportunities offered by branch associations and regional associations”.

Financial instruments rescue

While sharing his experience, J. Čapskis notes that exporting companies often face the problem of working capital: foreign partners, especially from further markets, often ask for a payment deadline of 90-180 days. Unfortunately, for many SMEs, such “freezing” of funds is unacceptable.

“The factoring service helps to control the company's financial flows: it allows to receive funds for goods or services immediately. As the export volume grows, the factoring service portfolio is also significantly increasing: in the last year it increased by 30%, says the specialist. The factoring service is particularly relevant for small and fast growing companies that do not have a credit history or a deposit required by the bank. As the goods provided to the customer are promptly paid for by the bank providing the factoring service, the exporting company does not encounter a lack of working capital. In addition, the company protects itself from the risk of a buyer's insolvency, reduces the cost of managing the buyers’ debts”.

True, the interlocutor says that not all Lithuanian factoring service providers are prepared to advance accounts of the companies from the countries with low credit rating: Lithuanian companies often cannot use factoring settlements with companies from Belarus, Ukraine or further Asian countries.

“In this case, it's worthwhile for the exporting companies to look for portfolio collateral for factoring transactions. Our bank proposes such a solution together with Invega, which provides a 80% guarantee for the transaction and reduces the factoring risk to the bank”.

Another effective solution for SME's to develop trade in high risk countries is export credit guarantees.

“In cooperation with Invega, you can insure up to 90% of deferred payments and make a factoring agreement with the bank. In this case, the total amount of guarantee per exporter cannot exceed 1 million euros”, says J. Čapskis

Poto by Rytis G.

Poto by Rytis Galadauskas

“First of all, foreign markets can not be entered into “blindly”: it's important to know the local market situation, the competitive environment, customer expectations, to understand the distinctive nature of your product or service, as well as to know the legal environment, consumer habits and many other important nuances”, says Justas Čapskis, Project Manager of Šiaulių Bankas Financing Service Development. Photo by Rytis Galadauskas

If the company sees long-term potential in foreign markets, it's worthwhile to hire an experienced specialist who would be responsible for expansion in foreign markets: entering into partnerships with potential customers, analyzing the situation on local markets.

If you think about exports:

  1. Find out what benefits this will bring to your business;
  2. Think realistic about export markets: people like to talk about China or India, but experts say that these markets are more favourable to niche products producing SMEs. It is important to understand that your goal is not to enter the market, but to reach the consumer;
  3. Consult with experts, such as Versli Lietuva specialists, Lithuanian representations abroad, branch and regional associations;
  4. Learn from mistakes and good practices from companies that are already exporting;
  5. Know the export market: its culture, business environment, laws; find a local partner or consultant if possible;
  6. Discuss with specialists your financial possibilities and make a specific financing plan;
  7. Have a long-term strategy, critically evaluate your options and terms.