A beginners’ guide to foreign exchange for small business
What is foreign currency exchange, how do rates work, and how can small businesses manage their foreign currency transfers? Find out the answers here
If your business has international commitments, such as managing imports/exports, investing in overseas real estate or running a foreign payroll, you’ll have to navigate the sometimes tricky waters of the foreign currency market.
In this beginners guide to foreign exchange for small businesses, we look at what foreign exchange is, how it works, and how your company can save money when managing its international money transfers.
What is foreign currency exchange?
Foreign currency exchange, or forex, is the process of exchanging one currency for another. The two currencies being transacted are a ‘currency pair’, with the exchange rate being the value of the second currency in relation to the first.
For example, if you have Pounds but need Euros, the currency pair you’re interested in is Pound/Euro. Currency pairs are usually presented in coded form, with their codes typically being three letters which represent the currency itself and the country it derives from.
The currency code for the Pound is GBP – GB for Great Britain and P for Pound. The currency code for the Euro is EUR – which works for both Eurozone and Euro!
With a currency pair, the currency you have is the base currency and the currency you want is the quote currency – the exchange rate of the pair tells you how much of the quote currency you’ll receive for one unit of the base currency.
In the case of GBP/EUR, an exchange rate of 1.40 means you’ll receive 1.40 Euros for every one Pound you’re transferring.
Are exchange rates static?
Exchange rates are far from static. In fact, the foreign currency market (on which currencies are traded) is one of the most volatile trading platforms in the world. Exchange rates can be moved by economic, social, political and even environmental developments, and can fluctuate by as much as 10% in a matter of days.
If you transfer your currency overseas when the base currency is weak (worth less of the quote currency than formally), you’ll get less for your money, but if you move your money abroad when the base currency is strong, you’ll be better off.
Keeping track of exchange rate movements and market trends can help you move your money abroad at the most lucrative time, and some companies will help you do this at no cost.
So, how can small businesses manage their foreign currency transfers?
The simplest way for small businesses to manage their foreign currency transfers is to do a little research and talk to a number of foreign exchange providers until you find one that understands your requirements and how to manage them cost-effectively.
Many banks offer international money transfer services, so your business may wish to go down this route. Alternatively, there are a number of currency brokers who might be able to secure you a more competitive exchange rate and help your business introduce risk-management strategies.
Other plus points of using a broker include being kept informed of the latest market movements with regular updates and having the support of a personal Account Manager. Some brokers also provide services, such as the option of fixing a favourable rate for up to two years in advance of a trade, which banks aren’t able to offer.
What path your business chooses to take may depend on the size and frequency of the currency transfers it needs to conduct, or in what manner it plans to safeguard against currency risk.
If your business has foreign currency exchange requirements, the best way to ensure that they’re managed effectively is to take the time to do a little research and look into all the options available to you. Once you’re confident that the provider you’ve selected understands your business and its needs, you’ll be able to protect your bottom line and enjoy greater profitability.