Third in our series on ‘The True Cost of Exporting’ is the cost of foreign exchange and suggestions on ways in which you can minimise these costs, while earning a little along the way.
There are a number of actions you can take to minimise the cost of foreign currency transactions for your business: negotiate competitive margins and fees for your foreign exchange deals, use foreign currency accounts, and use products which to lock in a rate or protect a worst case rate to convert your future foreign currency receivables.
Margins and fees
Possibly the easiest cost to minimise when dealing in foreign currencies, is the margin your provider takes on your foreign exchange deals. Your provider will take margin on both your ‘spot’ deals, that is, deals for settlement within two business days, and your ‘hedging’ deals, that is, deals where you lock in a rate or set a worst case rate for your future foreign currency receivables.
Margin just means the difference between your rate and the market rate where banks are trading with each other in large parcels, for example A$5 million lots. Market rates for spot deals are what you see on the TV and a number of free websites that regularly update rates, but this is not the rate you will get.
To negotiate the smallest possible foreign exchange margins for your business, you will need to shop around a little, at least consider your main banker and one other provider, which may be either a bank or non-bank. Be open, and make sure they know as much as possible about the size and nature of the transactions you need to do, and about what type of service you prefer; do you like regular phone calls or emails? Do you prefer on-line or over the phone dealing? This type of information will help the provider to quote a margin based on their expected income on your business and how much time you will take to look after.
As a rough idea, a business that has foreign currency transactions per year of around A$2 million per year, could expect a margin on spot deals of no more than 20 to 30 points on US dollar deals. This means that if, for example, you have negotiated a margin of 20 points, then your rate to sell US dollars when the market rate is 0.6500, would be 0.6520.
Apart from margins, you also need to ask the provider what, if any, fees will apply for each foreign currency transaction. These fees will vary between providers and you need to check they don’t offset the benefit of any reduced margins you have been able to negotiate.
It is not normally difficult to set up foreign currency dealing arrangements with a provider other than your main banker. The initial set up time of paperwork, learning a new platform and dealing with new people, could well be worth it if the margins on your foreign exchange deals are less.
Once you agree margins with a provider, and you are dealing with that provider, you still need to follow a process that ensures they are delivering the margins as promised. Take some time to document your foreign exchange dealing procedures; this should include a process of recording the approximate margins if possible, especially for spot deals.
There are free websites around that update market spot rates every minute, for example xe.com. So make sure you know roughly where the market rate is when you are asking for your rate, and don’t be afraid to question your provider before agreeing to a deal if the margin doesn’t look right.
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