“Many…businesses pay their overseas vendors in the local currency. But not all business owners have the time or expertise to figure out how to avoid being hit by a sudden change in the exchange rate.” – Suzanne Sataline, New York Times
As business collaboration continues to globalize and evolve, businesses around the world are increasingly making foreign currency transactions with clients, subsidiaries, debtors and more. As businesses trade across changing, sometimes volatile, currencies, they are turning to Foreign Exchange (forex) traders to mitigate risk.
How do these exchanges work, and how can small to medium-sized businesses manage these payments?
What Is Forex Trading?
Foreign exchange markets assist international trades and investments by enabling currency conversions for businesses globally. For example, foreign exchange markets allow businesses in the U.S. to import goods from the European Union on a regular basis. Though each company uses its home currency (the U.S. Dollar and the Euro, respectively), foreign exchange services facilitate currency conversions and enable both companies to conduct business with each other.
How Forex Works
In a typical foreign exchange transaction, one party purchases some quantity of a currency by paying for some quantity of another currency. Simplistically, forex trading is typically done through a brokerage or a market maker. Currencies that are expected to change in value are paired and traded accordingly. When trades are closed, the broker will close the position and credit the business’s account with a loss or a gain. This all happens within a matter of seconds.
It is advisable for small business owners to trade their currencies through a brokerage with a deep understanding of their business and needs. That way the broker can place trades accordingly. Finding and working with the right service provider can save businesses thousands of dollars a year by locking in currency rates and guaranteeing businesses the best possible price.
Why Should SME’s Care about Forex?
To operate on a global scale, executives need to be able to conduct business in multiple currencies. An SME cannot grow if it limits itself to only one geographic market or only one type of client. This is where new market expansion and various types of customer acquisition techniques come in – along with forex.
As currency values fluctuate, businesses need to manage their forex exposure as well as their currency risk. Hedging against future currency fluctuations can help protect business leaders from losing money in the case that there is a negative change in the value of the currencies they work with.
Businesses that Benefit from Forex Services
While forex considerations may not be top of mind for many small business owners, for some it is an integral part of their business. The types of businesses that utilize forex services are more and varied than you might think.
Companies that import and export goods from abroad are an obvious candidate for forex services. When working with foreign companies, dealing with foreign currencies is a must.
Corporate Service Providers
Companies that provide services internationally – such as accountants, tax advisers, private banks and building societies – need to protect their forex exposure and manage it effectively so they can continue to provide services to their foreign clients.
Businesses in the education industry might not initially come to mind when considering companies that have forex needs, but many universities have forex requirements due to the thousands of international students that enroll in courses every year.
Forex and risk management teams are crucial to businesses that organize shipments form all over the world. Such protections will help protect them from forex rate fluctuations and ensure that the goods they are providing are covered.
Fund and Wealth Managers
Fund managers and institutional investors continually seek efficient currency trading solutions and competitive pricing on foreign currencies.
NGO’s and Charities
Inbound donations to charities can come from countries around the world and in all currencies. Successful charities and NGO’s have a strategic plan for distributing funds to global stakeholders while reducing their currency risk for donations and payments.
Businesses that manage property purchases overseas exchange significant amounts of money on each property transaction. In this case, it is likely that both real estate buyers and sellers run on differing currencies and will desire to take measures to mitigate their currency risk.
Businesses within the travel planning and services industry have a special interest in managing their forex. In particular, successful travel businesses are constantly aware of and plan for currency fluctuations during peak travel times throughout the year, as Jean-Paul Tennant, chief executive of Geographic Expeditions, shared with the New York Times.
In late 2006, a double-digit climb of the rupee drove one of Tennant’s suppliers to raise prices, causing the cost of trip for Tennant’s customers to jump from $7,500 per person to $9,000. Since then Tennant has worked with experienced global currency traders to help him lock in costs.
Who Manages Forex?
Businesses looking to succeed internationally will look to pay their foreign counterparts in local currency. Anticipating their forex needs and who will take care of those needs will be a top priority for business leaders. Many times this is not handled internally, as small businesses do not often have a specific position or department that solely handles their forex trading. As such, finding the right service provider or partner is crucial to protecting the business’ international interests.
As more and more small businesses conduct business overseas, owners are learning that changes in exchange rates can and are cutting into their profits. Many small businesses are now turning to banks and forex services such as the Associated Foreign Exchange (AFEX) to create risk management solutions that mimic those of their larger counterparts.
For more information on forex for small businesses and how forex works, view this video by AFEX below.
Featured image by epSos.de