Foreign Exchange for Small Businesses

There are a number of challenges that face small businesses operating in Africa. One of these is dealing with constant foreign exchange fluctuations when buying and selling goods and services in the international market. For small businesses operating in Africa, depreciating currencies is a real concern as they are at the mercy of global markets.

It is therefore important for any business that wonts to operate on a global scale to find ways to mitigate the risk posed by working with foreign currency, and reduce the costs of transfers and exchanges as much as possible.

Some tips for dealing with foreign currencies when conducting business.

Extend the quote period
If you are paying oversees vendors in their local currency it can be difficult to avoid sudden changes in the exchange rate. By extending the length of time that quotes are valid, for example from three months to six months, you can be sure of your price despite fluctuating exchange rates.

Lock in the Price
A useful tool for businesses that have to deal with fluctuating foreign exchange rates is to use forward contracts to lock in an agreed upon price for a foreign currency. This strategy works particularly well for businesses that publish prices several months in advance. This is a great strategy as it takes uncertainty off the table for both the business and the customer.

Don’t gamble
It is important for businesses to be smart about their foreign currency exchanges. It is not wise to start trying to forecast currency movements or play the system. It is particularly important not to speculate with your corporate cash flows. Managing foreign exchange is not the core business of your company and you should aim to make neither a profit nor a loss on it.

Work with a trader
A currency trading company can be a huge help to a small business. They are generally more flexible than large banks when it comes to providing foreign exchange services. While banks may ask you place an order for large foreign exchange transactions 90 days or more in advance, and will hold you to the order whether you need the currency on that day or not, smaller traders are more flexible. They have the agility to give a few days leeway. They are also more competitive which often translates to better customer service and rates. If they see a swing happening in the market, it is in their interest to let their customers know.

When it comes to selecting the best foreign exchange firm, small companies need to consider the following:

  • The need for your business to gain exposure globally and be able to access new markets
  • A liquid FX firm can offer better exchange rates
  • Superior customer service from an FX firm is important so that you can concentrate on business operations
  • Certain FX firms permit eCommerce sellers to establish overseas bank accounts, which means better rates on foreign currency payments

Currency firm options

First and foremost, small companies need to determine whether the FX company is a good option as a business service or more suited to private clients. Secondly, the company needs to look at the pros and cons of using a large currency firm as opposed to a boutique currency firm.

Large currency firms typically have more offices and employees worldwide with a larger degree of trading, whereas boutique currency firms have less than five offices, fewer employees and lower volumes of trading.

The benefits of using a large currency firm include:

  • Better rates than smaller firms
  • A wealth of experience in various markets
  • A wider global reach
  • Being present locally, which makes it easier to manage complex transactions

On the downside, as a small business there is very little chance of you dealing directly with the head currency dealer or managing director.

Although boutique currency firms handle fewer currencies and are not as well-connected globally, it may be a more suitable option for small companies for the following reasons:

  • Greater skills and service from currency dealers
  • Willing to negotiate better rates than larger firms
  • Personalised services and access to the head currency dealer if necessary

With the volatility of exchange rates, small companies making or receiving international payments can also consider the viability of employing a hedging strategy.

A hedge is an investment to manage the currency risk of unfavourable price changes and provides a useful insurance against these movements.