International Trade

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How to avoid foreign exchange risks when exporting

5 Mins

Expanding overseas is a great way to grow a business, however it is important that small business owners think clearly about the steps that they need to take to ensure the move is as profitable and risk-free as possible.

Busy researching the new marketplace and arranging foreign suppliers and customers, it’s easy for small business owners to forget the issues that may arise when it comes to making and accepting foreign payments. With currency values constantly fluctuating, SMEs are at risk of unexpected cashflow shortages, as they conduct business across borders and in different currencies.

With the right risk management techniques, small businesses can avoid significant financial losses and unnecessary costs.

Know your risk

Analyse exactly where your business is at risk from foreign exchange fluctuation. Before any transaction, prepare your business for all possible outcomes, good and bad. Imagine that you sell to an American client who pays you in USD, but there is a 60 day period between the date of the sale and the payment date. If the USD/GBP exchange rate falls 20 per cent during that period, your revenue will also fall 20 per cent!

Stay one step ahead

Consider using hedging products like forward contracts. A forward gives you an agreed fixed rate to be paid at a later date, thereby protecting you from rate fluctuation (60 days in the example above). Depending on your product or service and their profitability, some products may be more suitable than others and the percentage of market exposure you hedge may vary from 0 per cent to 100 per cent. Market exposure represents the amount an investor can lose from the risks on a particular investment. The greater the market exposure, the greater the market risk. For example, a business involved in raw material trading usually hedges close to 100 per cent of their exposure.

Shop around

Beware of hidden fees in the exchange rates offered by banks. Additionally, keep your eyes peeled for high commission rates and delivery fees. They are all essentially one and the same: ways for the banks to make a profit on your transaction. With this in mind, the profitability of your company also depends on your ability to find a competitive FX provider such as XE.com. Full understanding is crucial to ensure you know exactly what you are being charged. It’s your money; demand transparency! Paying a large spread simply because you don’t have access to market prices is unjust.

Be careful, avoid complacency

Don’t choose products that you don’t perfectly understand. Unlike forwards, options are normally clouded by a lack of understanding due to their intricacy. Long contracts that tend to be very complex are best avoided. Negotiate hard but always make sure you understand what you are buying.

Ask smart questions

Brokers are known for what is called “dumping”- offering an unusually low initial exchange rate in order to snare new clients, only to then steadily increase the price through hiding fees in the exchange rate. This maximises their gains at your expense. If rates seem to be going up, don’t be afraid to ask questions and move to a more transparent provider.

Prepare prudently

Your business, your sector and the FX market all inevitably go through changes. Plan a regular review of foreign exchange practices with your financial director/CFO.. Ensure your company is up to date with FX market services and updates, and that your FX transactions are as financially profitable for your company as possible.

Avoid exotic currencies

Currencies outside the mainstream U.S dollar, euro, sterling, Canadian dollar, and the Japanese yen, among others, are best avoided. The exchange rates tend to be acutely unfavourable, as exotic currencies are infrequently traded and are lower in demand.

Philippe Gelis is CEO and co-founder of Kantox

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