In today’s post, we’ll take a look at common ways in which businesses are losing out when transacting internationally and will look at the importance of choosing the right business fx.
It’s beyond a cliche to even point this out now, but in the age of the internet the world is more interconnected than ever before in human history. All of us routinely stream TV shows made in Japan or Spain, we buy gadgets that are shipped to us from China and most of us have at least one Facebook friend situated on the other side of the world.
The advent of telecommunications and the internet has fundamentally changed the face of business forever too, allowing even the smallest, most humble of businesses to go global and trade with customers or suppliers internationally.
However, even though more and more business is now being done internationally, a lot of business owners still pay relatively little attention to how much transacting globally is really costing them. Sending and receiving monies to and from overseas recipients, and trading across currencies, carries a lot of hidden costs that can really eat into a businesses precious margins if they are not careful.
In this post, we will examine exactly what FX transactions are, how they work and why they may be costing businesses more than they realise.
What is Business FX?
Foreign Exchange (‘Forex’ or simply ‘FX’ if you are running short on letters) simply means trading one currency for another. All of us engage in FX trading whenever we go on vacation and change our money at the airport or whenever we buy something from a website based overseas (Alibaba or Wish being too prominent ones). In the age of digital products, it is becoming increasingly common to do a spot of FX trading whenever we buy an online course or a piece of software whenever the retailer is based in another country – even if you rely on Paypal, you are still FX trading and are still being charged for it.
The most common examples of business FX are businesses paying overseas suppliers and taking payments from international customers. For example, a craft brewery based in Denver may buy hops from Germany and then sell its finished beer to the market in the UK. Whenever they do this, they are sending or receiving international payments and changing currencines. Other examples include businesses that use offshoring who have to conduct payroll in another country and a very common example these days is businesses who use Indian based tech firms to supply their web support.
What Businesses Usually Get Wrong When Doing FX
The most common mistake that businesses make when doing any kind of FX is using their bank to make or receive a payment. Whenever an account holder (whether its business or private) uses their bank to make an overseas payment or receive money internationally, then their bank will charge them a transaction fee. This may be a set amount or it may be a percentage of the total amount. To offer some context, it is quite common for banks to charge transaction fees of $5 – $10 when handling international payments of just $100 – losing 5 – 10% everytime they make business payments abroad is simply not sustainable for a business.
Relying on banks also means that a business is at the mercy of fluctuations in the international exchange rates. If the USD declines against the Euro for example, then importing goods from Germany becomes more expensive; this could be catastrophic if a business is locked into a supply contract or is simply heavily reliant on one particular supplier.
These mistakes are all too common and cost businesses a lot of money. And the reason for these common mistakes is more often than not, a simple lack of knowledge. Even many astute business people do not really understand how FX works, and even the ones that do are not always sure what can be done to mitigate the costs. Another reason is that a lot of businesses are busy and do not have time to search for effective ways to handle FX – whilst losing $5 on a transaction is annoying, $5 is still not worth losing several hours trying to save.
However, there are actually some very effective, easy and quick ways which businesses can and should handle their FX and international business transfers needs. Let’s take a look at some of them.
Business FX Providers
Business Foreign Exchange providers are at their core, companies that specialise in buying and selling currencies to business. They make their profit by taking calculated risks on the global currency markets, buying a currency when it drops in value and then selling it on when it increases – much like stock brokers do with company shares.
However, FX providers also work with businesses and essentially act as a currency broker. If a business needs to buy a large amount of a certain currency or make a substantial international payment, then a business foreign exchange provider can help them to get a better exchange rate than the one typically available on the market.
Some Business FX’s also offer a “full service” whereby they will handle the currency exchange and then also take care of the international payment. They use their extensive networks to send a payment to the recipient without relying on the banks. In the example we gave earlier, our Denver based brewery could engage a Business FX provider to help them send €5000 to their German hops supplier – the FX provider would help them get the best rate on buying the Euro’s, and then send the monies to the hops supplier without levying a transaction fee like the bank would. Of course, the FX provider is not operating a charity and they are making their profit on the currency trade.
Forward contracts are when a business agrees to buy a certain foreign currency at a fixed rate. For example, a business may want to buy £10,000 over a 12 month period to pay a British supplier but does not want to be left at the mercy of fluctuations in the exchange market. They therefore enter into the Forward Contract and “lock in” the exchange rate.
Multi Currency Accounts
If a business regularly trades in a small number of different currencies, then a good option is to open a multi currency account. Multi currency accounts allow a business to hold a few different “pots” with various currencies such as Euros or Pounds in addition to their main USD balance. Again, this protects a business from changes in the currency markets. However, even multi currency account holders are still usually subject to transaction fees for making international payments.
So as we have seen, there are several ways in which a business can maximise FX to save costs and improve margins. With trading conditions being tougher than ever, entrepreneurs are looking for more ways to power through and save costs – therefore, it is perhaps little wonder that more and more businesses are now finally paying attention to FX and reaping the benefits.