Are you looking to make the most of your international trade? As your business has grown, chances are you’ve found yourself dealing with more partners, suppliers and customers from every corner of the world.
Making the most of international opportunities means setting your business up for the seamless transfer of foreign currencies, as well as ensuring that you stay smart about exchange rates and other potential fees. As foreign exchange rates fluctuate, you could see your costs increase and your profits reduce.
According to a survey by American Express1, nearly 7 out of 10 businesses have either lost money due to currency volatility or don't know whether they have. But there are a number of things you can do to protect your business and your bottom line.
Here are six ways to manage your international payments and protect yourself from forex fluctuations:
1. Encourage early payment
If you’re exposed to currency volatility because you’re selling to international customers, then establishing early payment terms is the simplest way to protect yourself.
Asking for all, or a chunk, of the payment upfront from customers means you eliminate or reduce your risk of suffering from changes in the forex rate between when you agree on a contract and when you’re actually paid.
If you’re concerned that customers won’t respond well to immediate payments terms, introducing early payment discounts will encourage them to take the option. Discounts or other incentives, like credit towards future purchases, gives your customers a financial reason to pay early.
2. Make use of forward contracts
Forward contracts are one of the safest ways to protect your business against currency volatility. These allow you to set the exchange rate you’ll buy or sell currency in advance, but you only pay for it at a set point in the future, when you actually need it.
For example, imagine you are going to buy €10,000 of supplies from a vendor in Europe. The payment terms you have agreed stipulate that you will pay the vendor for these supplies when you have received them, in six months. In between the agreement being made and you actually paying for the supplies, the Euro could strengthen and you would have to pay more GBP than you had planned for. However, if you took out a forward contract, you could agree to buy €10,000 in six months’ time for today’s exchange rate. This means you’re protected from having to pay additional money.
Forward contracts come in a few shapes and sizes and can be flexible to suit your needs.
3. Window forwards
Window forwards are a type of forward contract that offer more flexibility. Like a fixed forward contract, they let you lock in a beneficial exchange rate ahead of time. But while fixed forward contracts commit you to buying or selling a set amount of currency on a specific date, window forwards let you buy or sell over a set time period. This means if you know you’ll be making or receiving several payments, you can stagger your forward contract payments to match.
4. Take advantage of a natural hedge
A natural hedge, in forex management, allows you to reduce your risk due to currency changes by investing in the inverse risk.
For example, if you currently had sales of €100,000 within the EU, you’d be exposed to any changes to the exchange rate between GBP and EUR. However, you could naturally hedge your risk by, for example, purchasing supplies from an EU-based country. So, any change in the exchange rate that positively or negatively affected your sales would be offset by your supply purchases.
Natural hedges are usually less flexible when compared to other methods, and typically result in imperfect hedges (where your risk is not perfectly balanced). But, they can reduce your reliance on financial products to protect your business from currency volatility.
5. Streamline your payment solutions
You might not be ready to hedge your risk and can therefore take advantage of spot payments through an FX payment provider. Spot payments are agreements to buy or sell a currency on a set date (the spot date) for the exchange rate on that date.
1. In July 2019, American Express, through uGov, surveyed 1,000 SMEs, in the UK.
