Business owners all know there are some challenges of doing business overseas, especially with currency fluctuations between the time a deal is agreed and when payment is completed.
If you don’t have a hedging strategy you are often exposed to uncertainty and as Benjamin Franklin once said: “By failing to prepare, you are preparing to fail.”
Whether you’re looking at a one-off transfer overseas or importing/exporting hundreds of containers a year, using the right combination of payment and cash management strategies means you can improve cash flow and protect profits.
1. Save money on transfers
Most people and businesses will use their bank to make a money transfer as they’re probably unaware of alternatives that can make the process easier and save them a lot of money. You have to be aware of real transaction costs on international money transfers, as they are not always that transparent. When transferring funds internationally you have two fee structures – direct and indirect.
Most banks charge a high upfront fee to process the transfer and receiving fees are charged by the bank you send to, if it’s sent internationally.
These are (hidden) costs in the exchange rate itself and known as the margin. Banks often have the largest margins and can be as high as 5 percent.
In comparisonOFX(formerly OzForex) have minimal or no direct fees and offer far better margins than banks, allowing you to save hundreds if not thousands when settling your international invoices.
Whilst this may sound complicated, hedging is actually quite easy to do and can provide some certainty in your costs.
By taking out a Forward Exchange Contract (FEC) you can fix the exchange rate at a fixed time in the future with just a 5 percent of the total amount you need. This will remove the exchange rate risk, give you piece of mind, and protect your margins.
Next time you have an upcoming future expense ask OFX about hedging and they can walk you through your Forward Exchange Contracts or other products that may suit your needs.
3. Now create a strategy
It’s important to look at your business needs and build a plan around it.
First you should find out at what rate makes your international trade worthwhile or unprofitable. This will give you a trading range that tells you when it’s a good time to lock in a rate or not. You will also need to work out what your cross-border payment needs are, both incoming and outgoing, and set your actions accordingly.
This allows you to decide as and when you use a spot rate (for imminent payments, due now) or hedge forward using Forward Contracts (for future payments) when the rates are worthwhile.
Now relax knowing your business has been de-risked and focus on running your company.
If you have any questions or after more information around hedging, contact Jonathan Sermon from OFX directly (quote the code 2775)