By Gavan Smythe, Managing Director, iCompareFX
Transacting values in the billions every day, the foreign exchange market is one of the biggest in the world. However, it is one that remains confusing to many businesses, especially small and medium-sized companies, who often end up entering the market blindly.
Not only is this avoidable, but it results in exorbitant fees being paid for even the smallest of deals.
The key foreign exchange risks
There are numerous risks related to foreign exchange, regardless of a business’ size, with three of the most considerable being:
- translation risk
- transaction risk
- economic risk
All of these have a substantial impact on profit margins and are particularly hazardous for small businesses as their banks are more unlikely to offer currency hedging solutions.
Translation risks happen as companies with global dealings translate their intercontinental assets and liabilities as well as financial statements from foreign currencies to local currencies. This subjects them to foreign exchange risk, given that exchange rates remain prone to ongoing fluctuations.
Transaction risks are caused by variations in exchange rates from the payment date to the settlement date, which endangers businesses to additional possible expenses.
Any surprise fluctuations in exchange rates expose businesses to economic risk. If a business has invested in international projects, contingency risk also becomes an issue.
Soaring upfront fees for making international payments are also a concern. Unfortunately, costs are hidden and absorbed in the exchange rates offered, making it difficult for small businesses to comprehend exactly how much they are being charged.
Here, are the essential strategies SMEs use to avoid these risks and save money on their foreign currency exchange:
- Find the best deal possible
Conventional banks don’t normally offer the scope of financial payment options or secure global payment technology that FX experts do. Sometimes there is even a lack of visibility or influence over when transfers occur, meaning businesses end up consenting to whatever the current exchange rate is. Companies should contemplate working with money transfer companies with FX specialists and business account managers.
SMEs can agree on an advantageous exchange rate with FX specialists in several ways. For example, companies can negotiate the FX margin on the exchange rate offered based on the size of the transfer and / or based on the size of the future volume of currency exchange and transfers.
A few foreign exchange experts also provide the option of forward exchange contracts, which means buying the currency at a set amount in the future. Purchasing it at the forward rate, allows businesses to manage their risk of currency exchange rate fluctuation more accurately.
These are all strong solutions but remember what is best for each distinctive company will differ. To ensure businesses make the correct decisions, they must find the best partner to work with, who not only has the required FX expertise but is also prepared to take the time to assess the risk management tools most suited to their industry.
- Use time as an advantage
It’s always helpful to research if there are any times, which might be better for business currency transfers and, on the other hand, if there are ones which should be dodged.
There are time pockets where profitability increases or decreases, depending on daily, weekly, and monthly trends. For example, market volumes and prices go crazy early in the mornings. So, it might be sensible to prevent any foreign exchange transactions from happening during these unpredictable hours.
Some international money transfer companies don’t provide weekend money exchanges and transfers when the foreign exchange markets are closed. The FX exchange and transfer specialists that do offer weekend transfers, often raise their fees to limit their risk exposure to closed FX markets.
So, if a company wishes to pay its foreign suppliers on a Saturday their FX company may enhance the exchange rate margin offered to limit the currency fluctuation risk for booking a trade once the market opens.
- ‘Localise’ transactions
Banking like a local decreases the FX costs that clients may need to absorb when paying a business. Taking away foreign exchange costs for clients, means a company enhances its pitch for new customers in foreign markets.
Partnering with a money transfer company that offers multicurrency accounts is a beneficial option, as it is usually free to collect and hold money from global marketplaces or customers. This means businesses save on marketplace FX transfer fees and take advantage of better future exchange rates.
Banks don’t always have the most profitable exchange rates, but a foreign currency account located in a foreign market provides the option of keeping money in the currency of the transaction until it is best to exchange it. Being able to hold funds helps businesses circumvent multiple exchanges where suppliers and customers are in the same foreign currency too.
Monetary and political uncertainty, plus other substantial international events like the COVID-19 pandemic impact money markets in a big way. If a company runs in multiple foreign locations, it should endeavor to lessen potential risks.
One way this can be done is through hedging, which offsets money fluctuations in foreign markets. However, it is unusual for this activity to result in business profits, so consider the priority of a successful hedge as an activity to safeguard company losses.
Researching money transfer providers that suit a business’s requirements is important if SMEs want to save money in their foreign exchange. Businesses must also acknowledge their current situation, the risks and stay alert to market fluctuations.
