The top 5 mistakes SMBs make with foreign currency exchange
The world of foreign exchange (FX) can be intimidating for small businesses. But if you’re doing business internationally, it’s definitely to your advantage to understand the basics. It’s even better if you can avoid common pitfalls—and ultimately, save money!
We spoke with dedicated foreign exchange expert Alexander Youngman of GPS Capital Markets about the top five mistakes small businesses tend to make when dealing with foreign exchange. Read on to learn how you can sidestep these issues!
Mistake #1: Paying additional fees.
As Alex explained in our blog about how foreign exchange works, when small businesses default to working with big banks, they often end up paying a lot more than they should for their foreign exchange transactions (also known as FX or forex). Why? Because the banks often don’t tailor their services to SMBs’ needs.
But you don’t have to shell out. “In today’s market there is absolutely no reason why you should be paying transaction costs for foreign currency transfers,” Alex said.
Mistake #2: Not paying attention to the rate given to you.
Part of saving money on forex transactions is knowing what you’re being charged in the first place. With hidden fees and murky policies, that can be challenging. Check out your records and see if you can find out exactly what you’re paying for foreign currency exchange. If you can’t, ask yourself whether that’s okay. And if you can see your transaction fees—all of them!—ask whether your business should keep more money in its pockets instead.
“Some banks can charge airport rates to transfer money,” Alex said. “Again, this is something you should never be paying.”
Mistake #3: Not exploring further products.
“There are so many effective ways to manage the foreign currency risk which your business is exposed to,” said Alex. “I often see businesses are either not aware of what is possible or are not using the right tools to protect themselves. Different industries have better methods for best practice.”
In other words, it’s worth investing a little time in understanding what your options are. GPS Capital Markets can help you choose solutions that are tailored to the nature of your small business.
Mistake #4: Failing to protect your profit margin.
“Human beings are always looking for the best deal. We are greedy and want to make the most money, naturally,” said Alex. “This is often the same case for businesses.”
But sometimes, taking chances on a better deal can expose you to needless risk. “The wait-and-see mentality more often than not backfires in foreign currency exchange. If you know your profit margin is at a certain level, then make sure you protect that level.”
Alex advises protection, not speculation. For instance, he explains, “if you are selling roses into another country and your profit is 4 or 5% per rose, and the market moves 2% against, then you’ve lost 50% of your profit margin. Another example would be fashion jeans. If you purchase the jeans from Asia, there is a delivery period. You agree to a price in the beginning but pay on arrival. When you go to pay, that price may have moved because of the currency market.” A good foreign exchange firm can help to protect against these kinds of movements to ensure that, as a minimum, your business does not lose money.
Still, he says, there are tools to benefit from upside movement and still remain protected. Upside movement is the opposite of the situations described just now. In upside movement, if the market has moved in your favor, you can now buy that shipment of jeans for less money, which means you have benefited. This is unplanned profit.
“The truth is no matter what you do, you are speculating in one form or another. If you do nothing, you’re exposed to market movements. If you protect a budget, you’re speculating that the market may go against you, and you miss out if it goes in your favor. At GPS, our goal is not to speculate but to ensure clients get the best rates and achieve the best for their business.”
Mistake #5: Using only your bank.
Sometimes, loyalty does not reward you—at least when it comes to banks.
“There used to be a mentality that having everything with one bank meant you would get better business terms. This is simply not the case anymore,” Alex explained. “Banks are in a precarious position and are cutting costs across the board. Does that mean they have your best interests at heart?”
It’s often a better idea to consult with a broker to see what your options are. You might be surprised at the advantages of handling foreign exchange transactions in ways that bypass your bank.
If your company does international business, be sure to register for a free one-on-one consultation with Alexander Youngman of GPS Capital Markets here.