Foreign exchange is a crucial, but often overlooked, part of the profitability of a company’s operations. This is because historically, it was mostly large multinational corporations that were associated with overseas dealings. But today, everybody seems to have an AliExpress account and a customer base that transcends national borders.

The Basics of Business FX

FX, shorthand for foreign exchange, in its simplest form is converting one currency to another. For businesses, this may occur when selling a product to an overseas buyer, when importing supplies, but also for a multitude of other reasons like SaaS for your systems.

What makes business FX different from normal FX is its sheer complexity and volume. Whilst it depends on the business in question, there are many more factors to consider, such as bookkeeping best practices, avoiding poor FX rates that eat away at your margins, currency risk (volatile prices when holding overseas currency), and so forth.

Another common need for better business FX is the transition towards using freelancers and overseas workers. Whilst this can bring with it some administrative and compliance complexity, it’s logistically awkward and expensive to handle overseas payments, particularly when using traditional methods like banking.

The True Costs of Business FX Transactions

At face value, any given single cross-border transaction can incur a wire fee, often being as high as AUD$30. But, what can be more damaging is the exchange rate, in which financial intermediaries tend to have a habit of taking 2%-4% as the spread. This means that $400 could be lost on a $10,000 overseas purchase alone. The amount alone can heavily depend on payment processes too, as some marketplaces have expensive proprietary payment systems.

However, it’s not the costs imposed from the financial intermediaries alone that can harm a business. Currency fluctuations can pose a great threat, because it means prices now change - be it for the suppliers, remote workers wages, or even your own products - that you cannot control. A weakened Australian dollar, for example, can make paying Japanese imports immediately more expensive. If you are locked into a supplier deal, this can leave you without any option to pay the now-higher prices.

Likewise, for customers, Australian businesses may suffer from a strengthening AUD. Today, a AUD$168 product costs €100 for European customers. But one year ago, €100 only bought AUD$145. If rates fall back to where they were, your AUD$168 would cost €115, which is 15% more expensive. If your product has unitary elasticity of demand, your sales may be expected to drop by 15% in response.

Hedging Against FX Volatility

Hedging is the core tool in fighting currency risk. Primarily, forward contracts are a tool that businesses can use in order to lock in a pre-agreed exchange rate for a future transfer of money. You agree on an amount and a date, and the transaction must go ahead, but your FX rate is locked in.

Forward contracts and hedging possibilities are mostly provided by currency brokers and some money transfer specialists. Generally, high street banks do not offer these services to small businesses (but may for large businesses, such as with private banking solutions.)

This doesn’t just reduce currency risk, but it also makes forecasting much easier. You will be more certain over your financials in the near-term without worrying about sudden rises. This mitigation of uncertainty can free up more risk or ceasing of opportunities elsewhere in the business, like scaling up.

As for customers and stabilising the price they pay - it is possible to set different prices for different locations and denominate them in local currency. This way, prices remain stable for customers. As for your own takings upon conversion, it is possible to hold these currencies in a multi-currency account and wait for a preferential rate, or use regular forward contracts. If sales are unpredictable, option contracts have the option of not fulfilling the contracted exchange.

Choosing an FX Provider to Slash Bank Fees

In order to gain access to hedging products and sophisticated currency solutions, it’s important to find a reliable FX provider that offers a bespoke service. If you’re not confident when getting started with hedging, this is particularly important, and so is finding FX for business solutions (as opposed to a generic currency broker).

When it comes to how much FX hedging costs specifically, and subsequently which providers are the best, we cannot provide a specific recommendation. However, MoneyTransferComparison offers more insight on this topic for Australian businesses.

Australian businesses are best off picking providers that have offices in Australia, or at least on a similar time zone, as this can help ensure they understand the market and currency better. Ultimately, it’s about finding a reputable, licensed provider that has good reviews, a dedicated dealer, and a focus on business solutions.

Best Practices for International Money Transfers for Businesses

Being efficient with international money transfers can require some knowledge about how markets work, current affairs, along with a strategy. Below are some best practices to keep in mind when dealing with overseas currencies.

• Monitoring The Market - The more you understand about the AUD and other currency markets, the more context you will have for what is a better rate, or if the market is particularly turbulent. You can achieve this by reading financial news, but also see if your FX provider has any insights or newsletters for customers to read.

• Understanding Regulations: You can sometimes be faced with unexpected regulations when dealing with certain currencies, and particularly with hiring overseas workers. Ensure you’re compliant.

• Beware of Scams: When dealing with overseas transactions, your risk of being scammed can increase. Make sure the recipient is who they say they are, and that you’re dealing with a trusted party.

• Regular Audits: Auditing your company accounts to ensure you’re in good financial health is important, and things can get more tricky with different currencies. Here, you can see if extra savings could be made.

• Hedging: Make use of hedging tools to reduce currency risk

• Trust Your Provider: If you have a reputable currency broker, make the most of the dedicated dealer, which is often a free phone service that helps discuss, advise, and facilitate good business FX management.

• Rate Alerts: If you have decided on an FX rate that you’re happy with given the context of the market (and perhaps confirmed by your dedicated dealer), then a rate alert system can notify you of when a preferential business exchange rate comes available.

Final Words

International money transfer for businesses has become an essential component to running a small business in Australia. FX costs are deceivingly disruptive to many companies' bottom lines, even if they don’t perceive themselves as an international business - even subscribing to American software in US dollars can bring unwanted costs.

In order to mitigate this, businesses must follow FX best practices, which involves the use of hedging products. Ultimately, unless they’re financial experts already, a currency broker that focuses on foreign exchange for business will be the best way to obtain cheap rates and sophisticated currency risk management.