FD Insight: Mastering currency
They say the world’s an ever-smaller place, with fewer and fewer barriers to trade with even the most remote corners of the globe.
But whether buying, selling or both, one of the most complicated aspects of doing business overseas is the fact that we all use different currencies, and that values can fluctuate wildly on any given day, week or month.
There are, however, ways to make trade easier and to minimise the risks. Here is our FD’s guide to dealing in different currencies.
Consider dealing in GBP
Dealing in a variety of currencies can be quite a headache, but it isn’t always necessary. Some companies are able to dictate that they will deal primarily in their home currency. This helps if your product is in high demand, or you’re buying from a supplier in large volumes. The more another party wants to trade with you, the more they’re likely to do things the way you want.
Overseas companies may offer to deal in your native currency to secure your business, some charge a fee and others absorb the costs.
As with many aspects of business, it pays to ask. Maybe you can circumvent the entire currency issue by simply sticking to the good old British pound.
Set up accounts in multiple currencies
In many cases, you will need to deal with at least one other currency. Here you’ll face conversion fees and the uncertainty of values rising and sinking in largely unpredictable ways.
To combat this, many UK banks offer accounts specifically designed to handle a range of currencies. This allows you to send and receive payments without the need to exchange.
This is particularly useful when trying to clamp down on late invoice payments. Overseas organisations may want to wait until the exchange rate swings in their favour before sending payment. An account which allows them to pay in their preferred currency takes away this need for them to wait for a good deal, and can see you paid earlier.
Beware of other country’s methods
British bank accounts may offer to handle payments in a variety of currencies but, naturally, will charge for the service. If you’re trading with another country on a regular basis then the savvy move may be to set up an account in their territory.
This can save on exchange fees, but beware that banking systems work differently in different regions of the world. It may not be a like-for-like comparison against your UK bank, so make sure you read the fine print on what you will and won’t get charged for. Savings on low exchange rates, for example, can be more than wiped out by fees incurred when receiving payments, which is standard practice in some countries.
Utilise fixed exchange rates
Much of the concern over currency fluctuations is the uncertainty it brings. A good deal now may see the margins wiped out in just a few weeks if the wrong currency spikes or dips. One way to bypass this worry is to agree fixed rates with your bank or broker that allow you to set a price now that will they will honour for as much as two years ahead.
This eases cashflow worries and means there’s one less unknown in the equation. But on the other hand, the other party is taking a risk and will likely charge accordingly, setting rates or fees that protect themselves. And, of course, if exchange rates do swing in your favour, you won’t benefit, just as you won’t lose out if the opposite were true.
Befriend a broker
Often the smartest way of buying and selling currency is to partner up with a broker. Together with their other clients, they may have the buying power to secure better rates than you would have access to on the high street.
Another advantage is that currency brokers study the markets much more closely than you will likely have chance to do, and will have a keen eye for upcoming trends. Build a close working relationship with a broker and they will be able to pass on this information. You can use this to your advantage to stock up on currency when it’s more affordable, or wait to make a purchase if better times lie ahead, so that you are prepared for purchases further down the road.
Use forward contracts
Forward contracts allow you to agree now the details of a purchase you want to make in the future. These sorts of deals are useful if you buy the same products in the same volumes regularly, or even if they’re seasonal and you can predict what you’ll need in several months’ time.
Where forward contracts come in useful is that you can set a price that won’t fluctuate. If you agree a cost in sterling, then you’ll know exactly what you’ll owe when the time comes. If it’s in a foreign currency, you have the advantage that you have earned several months to prepare and can stockpile cash at times when the exchange rates are in your favour.
Do you trade regularly overseas? Please consider taking FD Recruit’s International Trading survey, letting us know the opportunities and barriers you face. It should take no more than five minutes, all answers are kept confidential and we can use the answers to lobby on your behalf.
Date Posted: February 25th 2016
Posted By: Phil Scott