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What do SMEs really need to know about foreign exchange?

business-articlesWhat do SMEs really need to know about foreign exchange?
Taking your operations global can open the door to all sorts of opportunities – but it’s not without its fair share of challenges.

One such challenge is how to manage your international payments – an issue which has become increasingly important over the last few years as growing global uncertainty inspires exchange rate volatility.

But, as a business, what do you really need to know about foreign exchange (FX) in order to streamline your international payments and maximise your revenue?

Understanding exchange rates

Whether you’re paying international invoices or receiving export payments, the exchange rate you secure for your transfers can have a big impact on your bottom line.

But exchange rates are volatile things and can move by as much as 5% in a matter of weeks, meaning the value (or cost) of an international payment can change substantially over time.

A whole host of factors can inspire currency movement, from economic and political events to social upheaval and even environmental factors, and while you can follow currency trends to a certain extent, some shifts can be sudden and dramatic.

The fact that exchange rates are always moving can make costs unpredictable, but the provider you use to manage your international payments also has an impact on the exchange rate you achieve.

Some providers are able to offer more competitive exchange rates than others, so it’s definitely worth shopping around. By using a currency transfer specialist you may also be able to avoid the transfer fees charged by most banks.

Balancing risk with reward

With situations like Brexit and an unpredictable US administration exacerbating the volatility of the foreign exchange market, exchange rates have been behaving especially erratically over the past couple of years.

Such dramatic shifts can make it extremely hard for businesses to budget their international payments effectively.

For instance, while a £5000 transfer into USD may have been worth $7000 back in April 2018, as of September 2018 the same transfer would only net you $6500 – and the difference would be even more pronounced on larger transfers.

This can put additional strain on many small business, especially online retailers who already work with razor thin profit margins.

While you can’t avoid exposure to currency risk entirely, by staying abreast of the latest currency news and forecasts you will have some idea of which direction the market is likely to head in, helping you plan futures transfers more effectively.

One way of staying informed of the latest market movements is to sign up for daily updates from a reliable currency broker. By receiving the latest news straight to your inbox you’ll have the insights you need to gauge any potential risks to your transfers.

Timing is everything

Of course when running a business it’s unlikely that you’ll have the time required to constantly monitor the currency market so you can act as soon as an exchange rate moves in your favour.

If you have an ideal transfer rate in mind then you may want to consider setting up a rate alert.

Setting a rate alert means you’ll be notified immediately by email or text the moment your desired exchange rate becomes available, helping you to capitalise on a favourable movement.

Forward thinking

Currency brokers can also offer more than just a competitive exchange rate, with a whole host of additional services that can help to make your international transfers as efficient as possible.

For instance, using a forward contract could help your business protect itself from unfavourable shifts in the exchange rate and make it easier to budget from one year to the next.

According to Phil McHugh, Chief Analyst for Currencies Direct: ‘A forward contract creates an agreement with your broker to buy currency at the current market rate up to twelve months in the future. It means you could benefit from a positive shift in exchange rates, lock in your costs, and minimise the risk of a sudden downturn.

‘Of course, fixing a rate in this way does mean you could miss out if exchange rates later strengthened, but knowing the Sterling cost of your invoices up to a year in advance allows you to create more transparent cash flow projections, budget effectively and free up cash to invest in your business.’
While you certainly don’t need to understand all the minutia of how exchange rates work, having an understanding of current market conditions and the payment options available could prove invaluable – so it’s well worth doing a bit of research and benefiting from the support of the right provider.

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