Any small or medium business that trades internationally is vulnerable to the ebbs and flows and fluctuations of foreign currency rates and the volatility of global forex markets. Indeed, a sudden, sharp shock to a currency’s value can render some transactions uneconomic as the “real” cost of the product being bought or sold changes almost overnight.
Added to this is the associated banking and transaction costs that come with making foreign exchange transfers which can really eat into a small business’ profit margins. In this post we conduct a bit of an international money transfer landscape comparison. We will take a closer look at how a business can try to protect itself against changes in the forex market as well as a few cost effective ways to execute an international money transfer for businesses.
How Foreign Exchange Transfers Impact Business
Let’s imagine that we run a small to medium enterprise (an SME). We operate a US based, online clothing business that buys its fabrics in India and South Asia and then sells domestically and worldwide (especially to wealthier consumers in Europe and Australia). Our business’s ‘base currency’ is the good old USD. Our business bank is located in the States, we pay our wages/dividends in USD, and of course we pay our taxes to Uncle Sam in USD. However, in order to operate, we are regularly buying stock in Indian Rupees or Thai Baht, and then getting paid for our finished wares in Euros, Pounds and Aussie Dollars. As such our business is regularly making business payments to a bank abroad.
Our humble business is therefore exposed to changes in the forex markets. For example, if the USD drops against the Rupee then our raw materials become more expensive to buy. This can prove particularly problematic if we are locked into a purchase agreement. At the other end though, if the USD rises against the Euro, then our European clients may suddenly find our goods become too expensive to buy from us.
Furthermore, each time we make or receive an international payment into or from another currency, our business is incurring fees and these fees can easily add to us as much as 3% of each and every transaction. As a small/medium business enterprise with a turnover of around $1 million, that’s taking a whopping $30k annually from us.
There is a lot to think about here and whilst forex markets and exchange rates are well beyond our business control, there are some steps we can take.
How To Make Cost Effective International Money Transfers For Businesses
If our business simply relies on the banks to handle the international payments and currency transfers, then this would be a big mistake. Whenever banks deal with international payments, they levy fees and apply exchange rates that favour them at their customers expense. Note here that both the senders and recipients banks will both charge a fee and as such the 3% figure was floated as an example may even prove to be a best case scenario.
Therefore it is vitally important that we assess the international money transfer landscape and try to find cost effective ways to move our money around the world, make payment and receive payments in foreign currencies.
The good news is that the days when small businesses were forced to rely on the banks have passed. Rather there are now many online platforms that are able to offer cost effective and fast international money transfers. One prominent example is Wise (formerly Transferwise). Wise was founded in London in 2010 and quickly won favour with ex-pats, freelancers and digital nomads who needed to pay clients and get paid internationally. Wise’s transaction fees are a fraction of those the banks levy and they also generally offer better exchange rates than the ones the banks apply. The online banks Revolut & Monzo are also now offering fast and cost effective international money transfers as well as easy to open, low cost business banking accounts.
An added advantage of online platforms like Wise and Revolut, is that they also offer multi currency accounts. In addition to a main account (i.e., a USD one) customers are also able to create sub-sub-accounts in a foreign currency. This is a very interesting prospect for any small business that regularly transacts in particular currencies.
In the example case study we provided, our business could open a sub account in Thai baht and leave a balance in there to pay suppliers as and when it needed to; this would remove any concerns over changing exchange rates and would minimise the international transfer costs. We could also keep a Euro account and hold any payments received from European customers there and wait until the exchange rate was favourable to change it to USD (of course, there are associated risks that come with this).
Whilst online platforms such as Wise and Revolut have some clear strengths, they do not always offer the best possible exchange rates. This is why a small business should also consider utilising the services of a currency broker.
As the name suggests, currency brokers can help their clients get the best possible deal on a forex and routinely provide the cheapest fx rate for businesses. They utilise their network and sheer volume to deliver exchange rates which can sometimes even be better than the market rate. Currency brokers are very useful when a business needs to make a large exchange and they are less appealing for smaller transactions. In addition to making payments though, currency brokers can also be used to receive a business payment from abroad – you simply have to tell the payee to pay the monies into your brokerage account.
There are some additional benefits of using a currency broker. When a business opens an account with a broker a dedicated, focused account manager is appointed who knows the business, its goals and the forex risks it is exposed to. As such a currency broker is able as they are able to provide personalised advice and full forex management.
There is no one size fits all outcome here. Rather all different businesses have different needs. In short though, currency brokers primary specialty is SME currency exchange and they are at their most effective for handing medium to large transactions. One example when a currency broker can be useful is when a business has to pay a sizable invoice in a foreign currency.
The online platforms on the other hand, can be more useful for more low level transfers such as paying small invoices, making fast payments, or receiving payments from retail customers.
Most businesses may find that there is a time and a place for both, and so the good news is that any business is completely free to use both.
However, there are some companies out there that offer the best of both worlds. Some currency brokers have identified the challenge to their market share posed by the rise of online money transfer platforms and have begun to offer SME money transfer services themselves.
Currency brokers like Worldfirst, OFX, Moneycorp, Currencies Direct and Spartan FX are all now able to deal with a businesses forex needs, offer the cheapest foreign exchange rates and handle money transfers too. In practice, all a business needs to do is approach their broker, tell them how much money they need to send in the stated currency and where it needs to go, and the broker can handle the entire transaction. Of course, the broker will charge a fee but the better rate they can offer on the currency exchange can offset this and it does create a “one stop”, seamless service.
The bottom line is that in these challenging economic times, every dime and dollar counts. As such any business that regular transactions internationally needs to take this all very seriously. By engaging the services of a reputable currency broker and familiarising themselves with the online transfer platforms out there, a small business can hopefully bring that 3% transaction cost on foreign exchange transfers down by a few percentage points.
At the end of the day, international money transfer for businesses is always going to carry some cost, but at least now it is easier than ever to minimise them.