Hedging Your Foreign Exchange: A Must for All Multinational Businesses!
Many small businesses aspire to go global because this increases their opportunities immensely. And the digital world of today makes it much easier for SMEs to start dealing internationally. However, one thing that often goes overlooked in the guides for small business to go global is currency risk.
Not accounting for this factor can ruin your business very fast. Therefore, it’s essential to not only take it into account when doing calculations and preparing your business plan to go global. You also need to understand what kind of impact currency risk can have and find ways to reduce it effectively.
What Is the Impact of Currency Exchange Risk on Small Business?
Currency exchange risk, better known as forex risk, is an unavoidable risk for all international transactions. It refers to the losses caused by changes in foreign currency exchange rates. Those fluctuate all the time and sometimes those changes can be rather big. On one hand, this might be a change in your favor, but more often than not, it will be the other way. Simply put, your business is guaranteed to lose some part of the profit on currency exchange when you become multinational.
Considering that small businesses that go global have a small profit margin to begin with, this risk alone can make it unviable for you to take this step.
The problem here is that many entrepreneurs do not consider this a major risk. In fact, they often do not look beyond the convenience of international payment methods and therefore use services like PayPal or bank transfers to set up international payment routes.
Even if they use online transfer services that offer better rates, like World First or TransferWise, they mostly rely on spot FX trades. And there’s nothing wrong with this, but this kind of trading is extremely restrictive, Most importantly, it leaves your business highly vulnerable to the aforementioned forex risk.
The solution is to use hedging tools that can help you stabilize FX rates to some degree.
Hedging Tools That Can Help Mitigate Foreign Currency Exchange Risks
Hedging tools are what you use to avoid or limit potential losses on foreign currency exchange. They are rather varied and you need to consider every option carefully to choose what will work best for your business strategy.
The best hedging tools for small businesses to use are:
In essence, forward contracts allow you to purchase the obligation to exchange currency at some point in the future at a rate fixed now. However, as it’s an obligation, you must make the exchange within the set time frame.
Unlike forward contracts, options give you the right to exchange currency at a fixed rate. This means that you choose whether to use it or not.
Swaps are when the buyer and seller of currency, essentially, swap amounts use them for the designated time and swap back at a predetermined rate.
Futures are similar to forwards but more flexible because you can offset currency depreciation by trading them.
It’s OK if you understood very little of the basic hedging tools’ overview above. One needs to be an expert in this field to see the strengths and weaknesses of every tool and apply this knowledge to the fluctuations in the FX market. Therefore, a non-professional or even someone with knowledge of finances but little experience with FX trading is sure to be lost.
Does this mean that small business owners can’t use these solutions effectively?
No, this simply means that you need professional help to do this. The best news is that today you don’t even have to hire an expert for this. Leading online money transfer companies offer currency consultations as a part of their service package. They also give you a chance to use a variety of hedging tools and have their teams of experts making predictions for currency exchange rate fluctuations.
Therefore, a small business owner should consider the tools they will use to receive and make interactions payments with extreme care. It’s not only convenience that matters in this case, but also the range of FX services offered by the company.
However, don’t worry if you can’t use one of the leading online money transfer platforms because it’s not yet available in the countries you are working with. There are many consultancy agencies and individual FX experts who can provide you with advice and assistance if you want to use the power of hedging tools.
Coming Up Next Year: FX Instability
As a small business owner who plans to go global or is already operating in the international arena, you need to take a careful look at the volatile economic situation of today. From the US-China trade war to Brexit and hundreds other issues in other countries, the global economy as a whole is becoming unpredictable and unstable. And this means that foreign currency exchange will be even more volatile come next year.
These global issues will not be resolved easily. And even if they are resolved, their impact will linger for some time before the situation stabilizes again.
The worst thing about all this is that foreign currency exchange rates are not merely more volatile than usual. They are also getting extremely hard to predict even for experts. There are too many global factors involved in the underlying economic issues to make any accurate predictions.
And being a business owner, you can’t allow yourself to rely on luck and shaky prognoses. Therefore, you need to stabilize your international payments as much as possible right now. This means using hedging tools to secure rates that will provide your business with some much-needed stability.
However, predictions are already hard to make, so using those tools even now is hard. It’s imperative to make your decisions based on the counsel of highly qualified experts. This means that now might be the time to review your current money transfer company and see if there are any better options available.
Without taking these steps to protect your business, going global might be a huge mistake, especially in the upcoming year. And considering the small business failure rate, this might be the mistake you won’t be able to recover from.