Globalisation has never been so prevalent. A growing number of entrepreneurs are tapping into new markets in other countries or using international suppliers and manufacturers. Perhaps your business is already making use of these opportunities, or you are thinking about expanding. As a result, international payments are likely to be part of your standard business process.
In the short term, it may be necessary to have some extra cash to get things started with expansion and new suppliers. Taking out a flex loan could provide you with quick and flexible funds to cover the costs of that stage. Once you are all set up, invoice finance can also help you manage your cash flow if foreign exchange rates fluctuate.
What Is Foreign Exchange?
Quite simply, business FX, sometimes abbreviated as business fx, refers to the act of exchanging one currency for another. ‘Currency pairs’ are the units by which currencies are traded. One ‘base’ currency is always in use when you trade, and another ‘quote’ currency is in use when you exchange it. Exchange rates determine how much of the quote currency you will get for one unit of the base currency.
Although that’s fairly straightforward, exchange rates are not fixed, therefore, regularly exchanging currencies involves some risk. Hence, it is important to plan your payment strategies to get the maximum value for the goods or services that you purchase in another currency.
Factors That Influence Exchange Rates
The exchange rate of currencies can be affected by a variety of factors. Several factors affect market confidence, including political, economic, and social factors. The value of a currency may weaken against other currencies if a government introduces a new policy that is unfavourable to one group in that country.
An interest rate decision, inflation rates, consumer spending levels, and unemployment figures are the typical drivers that affect markets. Nevertheless, events over the last 5 or 6 years have been particularly impactful. Currently, uncertainty associated with the pandemic and different monetary policies are having a significant impact on exchange rates worldwide. Similarly, the way governments have responded to the pandemic and their outlook for economic growth affects the market.
How Small Businesses Can Minimize The Risks Of Fluctuating Exchange Rates
Even though exchange rate fluctuations can be frustrating to your business and your customers, there are some steps you can take to make things easier:
- Track The Exchange Rate: Keeping up with the fluctuating exchange rate changes is paramount to your business when dealing with fluctuating exchange rates. You can sign up for a rate alert service through most companies. In addition, be sure to choose which currency pairs you want to keep track of and you will receive an email or text when the rate changes. Pay attention to the fluctuations of the currencies that matter to you as well as the events that might sway a change.
- Lock-In An Exchange Rate With A Bank Or Provider: Hedging is referred to as a forward contract. In essence, you are creating an arrangement for “buy now, pay later” with a bank or FX provider. A specific payment date will be agreed upon and the current exchange rate will be determined. This could be several months from now or years in the future. The funds will be paid in full or in part at any time during the contract. A fixed-rate is a way to safeguard your profit margin, not to beat the currency market.
- Agree To Contracts Only In Your Home Currency: Thus, there is a greater likelihood that prices will remain the same. Nevertheless, you are asking your supplier to take on all the risk since they will be paid in your currency and will have to exchange it themselves. Often, this works best for large orders or companies with more resources.
- Set Up Multi-Currency Accounts: By paying and getting paid in your own currency, you can avoid foreign exchange fees as well as potential losses resulting from a poor exchange rate. For instance, you can hold pounds, euros, and any other currency in your one account. You can also use these for online marketplaces, which means you can sell globally without having to pay high fees.
Although nobody can predict how the value of a currency will compare with another, doing business throughout the world is still a safe undertaking. Banks and FX companies provide services that can help you manage the changes and make sure you remain in control of the money you pay and what you receive.