The foreign exchange (FX) market is one of the largest in the world, worth billions of pounds. And for those navigating the market wisely, there are significant savings available. However, businesses which enter the market blindly risk landing themselves with eye-watering fees, even when conducting the smallest of transactions.
Understanding the risks
For any business, there are three main risks associated with foreign exchange:
- Translation risk
- Transaction risk
- Economic risk
However, these considerations represent a more significant impact for small businesses, as their banks are less likely to offer currency hedging solutions.
Before businesses can prepare themselves for these risks, it’s important to understand how they may impact their finances. Translation risks are the potential losses accrued when an international business’ assets, liabilities and financial statements are converted from foreign currencies in each market, back to their local currency.
Transaction risks are the potential financial losses which may occur as a result of fluctuating exchange rates in the interim period between a contract being entered and settled. Business’ accounts will reflect the financial terms initially agreed in the contract, but these may end up changing before it’s completed, as currencies become more or less valuable.
Then, there are the additional economic risks posed by unexpected fluctuations in exchange rates, hidden or hefty admin fees and potential contingencies. So, how can businesses negate these risks?
Take a local approach
One way for businesses to manage these costs is banking locally in each of their international operating regions. By doing so, they reduce the FX costs of converting foreign currencies into their base currency. These savings can then be passed on to the customer, helping businesses improve their pitch.
A simple way to negotiate this is partnering with a money transfer company and opening a multicurrency account. This allows businesses to collect and hold multiple foreign currencies for free and wait until exchange rates are favourable before converting.
This also helps businesses navigate often sub-prime bank exchange rates and avoid multiple unnecessary exchanges, where suppliers and customers are in the same foreign currency.
Social factors – like political instability and, recently, the global COVID-19 pandemic – can also unexpectedly impact currency markets. So, if a business operates in multiple countries, it should aim to alleviate possible risks.
One way this can be done is through hedging, which offsets money fluctuations in foreign markets. However, it’s rare for hedging to result in companies making money, so a successful hedge should be considered as an asset that helps businesses avoid losses.
Work with specialists
Not only do traditional banks rarely offer the breadth of payment options or global payment technology available with FX specialists, but they also typically lack the visibility and control that allows businesses to access an optimal exchange rate.
FX specialists, on the other hand, allow for more precise forecasting, reactive timing and even hedging opportunities, helping businesses minimise losses and convert currencies at the right time.
Negotiating with FX specialists allows businesses to access the rates that improve their bottom line. For example, businesses can negotiate the FX margin on the exchange rate offered, based on the size of the transfer or the future volume of currency exchange and transfers.
Many foreign exchange experts also give businesses the option to buy currencies at a set amount in the future. This is referred to as a ‘forward exchange contract’ and allows them to negate the risk of future currency exchange rate fluctuation.
Businesses looking to take advantage of these potential tactics are advised to partner with an FX expert which understands both their industry and which risk management tools are most suitable.
Comparing providers puts businesses in the optimal position to achieve the best rates, at the best time, over the long-term.
Timing is key
When it comes to money transfers, timing can be make-or-break for businesses. There are key windows in which profitability can go up or down, depending on daily, weekly, and monthly trends.
For example, market volumes and prices can fluctuate rapidly, early in the morning. So, it’s often better to avoid foreign exchange transactions during these volatile hours.
Similarly, many international money transfer companies don’t offer weekend money exchanges, when the foreign exchange markets are closed. And those which do may increase their fees to negate their risk exposure to closed FX markets.
So, for SMEs looking to pay a foreign supplier on a Saturday, their FX company may increase their exchange rate margin to mitigate the currency fluctuation risk for booking a trade when the market opens.
For businesses aiming to save money in their foreign exchange, an understanding of the market is key. However, working with an FX specialist, they can navigate the risks and market fluctuations to make sure they are consistently achieving the best rates – which translates significantly in their bottom line.
Gavan started iCompareFX back in 2014 after discovering the easiest way to wire money internationally was through a specialist provider and not the big banks. Living an expat life across five countries, Gavan was feeling increasingly frustrated by the fees, length of time and bureaucracy of transferring money and thought there had to be a better way.
Working with global clients, he has become an expert in comparing money remittance companies. An ex-financial/IT nut turned entrepreneur, he reviews the best and cheapest providers available on the market.
Gavan’s expertise in comparing money remittance companies now lends him to being a leader in the industry driving new innovation and offering an enhanced service for all his customers.