Risk mitigation for commercial finance brokers
Sophie Grosvenor October 25th 2023 - 3 minute read
The past few years have been a challenging time for commercial finance brokers. Rising interest rates are putting the brakes on economies around the world and dampening demand for finance, while also increasing other associated dangers and pitfalls.
But while some factors may be out of your control, there are ways you can mitigate the risks.
The interest rate outlook
While many are hopeful that the world’s central banks are at or near the ends of their tightening cycles, the days of ultra-accommodative policy seem long gone.
Rates are likely to stay elevated for a long time, and they may not return to the levels seen in the wake of the 2008 financial crash for many years, if ever.
Furthermore, central bankers and economists have warned that new shocks – such as a wider conflict in the Middle East following the Israel-Hamas war – could trigger a fresh spike in inflation and push borrowing costs even higher.
This mixture of higher rates for longer and ongoing uncertainty creates a challenging outlook, but being prepared for the future can help you weather the headwinds.
Mitigating currency risks
The recent shifts in monetary policy – along with economic uncertainty, geopolitical tensions, and huge supply-side shocks – have caused notable volatility in the currency market.
For finance brokers and their clients dealing in multiple currencies, the big swings in exchange rates introduce additional risks. Fluctuations make it difficult to budget, while negative shifts in a currency’s value can bring big costs.
One key way to mitigate the risks of unfavourable FX movements is to use a forward contract. This allows you or your client to lock in an exchange rate up to a year in advance of making a transfer.
While you won’t benefit if the rate improves, you will be protected if the market moves against you. You’ll also have certainty, knowing exactly how much you’ll receive when you make a transfer.
At Currencies Direct we offer forward contracts and a range of other risk management solutions, paired with personalised support, to help our customers navigate currency volatility.
Interest rate hedging
Although central banks seem to have ended their recent hiking cycles, there’s still huge uncertainty around how long rates will remain elevated for. Meanwhile, many economists warn that the world could face more frequent shocks, requiring policymakers to tweak interest rates more often.
To tackle the risk of changing interest rates, commercial finance brokers may want to consider whether certain interest rate hedging products are suitable for their clients.
The certainty they provide could help businesses make sustainable choices while providing protection from unexpected shocks in the future.
Brokers can upsell these products to add value and potentially increase business when demand for lending is low. Meanwhile, lenders may benefit from the reduced risk of a borrower defaulting.
It’s vitally important, however, that interest rate hedging products are sold to customers appropriately and in the right circumstances. Mis-sold products create risks, rather than mitigating them, increasing the chances of a default as well as regulatory and reputational consequences for all involved.
Regulation and reputation
This leads us on to another area where brokers can mitigate against risk – regulation and reputation.
Being vigilant is important for ensuring regulatory compliance. It’s always best to err on the side of caution and keep meticulous records so that you can show that you’ve acted ethically and responsibly.
In addition, keeping up to date with developments in the sector gives you more space to adapt to any potential regulatory changes, such as the recent Consumer Duty. The NACFB has a useful Consumer Duty hub where you can find useful information and materials.
Operating with regulatory excellence will also help you build a strong reputation, which is vital for any business’s long-term success.
NACFB members can go through an assurance process, which provides resources and accreditation that demonstrate the broker’s integrity.
While the global interest rate outlook remains uncertain, you can still prepare yourself and overcome the challenges ahead.
In addition to the ideas covered above, it may be worth taking the time to assess the specific risks facing your business and look for areas where you can build resilience.
If you or your clients are handling different currencies, it’s definitely worth developing an FX strategy. Get in touch with us at Currencies Direct and we can help you with a currency risk management plan tailored to your business.