Many small and medium-sized businesses in the UK operate on tight margins and have to manage every cost closely to ensure they remain in profit. For import/export companies, the greater the difference between an FX transaction and the spot inter-bank exchange rate, the more excess they are paying. A higher excess means lower profits. Below Steve Plant, CEO at WhichFX, lists his top 5 tips to making the most of foreign currency trade.
International trade is worth over £700 billion to UK SMEs according to global management consultancy firm McKinsey&Co, and recent figures from Oxford Economics show that 50% of SMEs are currently trading internationally.
Steve Plant is a serial entrepreneur who knew he was being taken advantage of by banks and FX brokers. In response, he developed WhichFX, the first and only live broker comparison site, to help small businesses to get the same FX deals as multi-national corporations. Here he offers five tips for SMEs to get the best deals on their FX transactions.
1. Plan Ahead
If time allows, assess market conditions and currency trends so you don’t have to rush exchanges, which could lead to poor rates and higher costs. Spot contracts allow you to set up a transaction in advance, which will only occur when a pre determined favourable market rate is met. Alternatively, forward contracts allow you to apply current market rates to future transactions, ensuring you are protected against future fluctuations.
2. Shop Around
While most businesses rely on their banks to complete their FX transactions, they are in fact sacrificing considerable costs for convenience. The FX market is confusing, and it can take a long time to compare different banks and brokers. It is particularly tricky to compare like for like as you need to take into account differences in rates, commission, and transaction fees.
Comparison services can help you search for the best deal, however initial quotes often differ from final transactions. WhichFX bypasses the banks and the comparison sites by putting brokers in direct competition with each other for your quote, ensuring you get the best live deal without the need to speak to multiple brokers.
3. Know your market
It is key to understand the markets you are trading with. Research significant global events that could affect the currencies of countries you deal with, such as political, economic or natural disasters. This will reduce the risk of any nasty surprises with future trades. An easy way to stay on top of this is to set up Google alerts so you are alerted to any relevant news. If you work with a reputable broker they should ensure you are kept informed about these events.
4. Set a budget rate
To ensure you can predict your foreign exchange costs in advance it is essential to work to a budget rate and where possible aim to match or better this. This will allow you to forecast and price goods accordingly.
5. Beat the Brexit blues
The pound has been very turbulent since the Brexit result, making it even more essential for directors and owners to be extra vigilant when trading internationally. Brexit is here to stay and speculation will continue until the final deal is agreed. Of course, SMEs should be aware of this and keep an eye on what is happening. A weak pound could actually be beneficial to British SMEs that sell their products abroad, so stay optimistic and plan ahead for every eventuality. The rules of international trade may change, but it will still form a cornerstone of the UK’s economy, especially for SMEs.
Through continued trade with Europe, and new opportunities in emerging markets, FX strategy will remain an important aspect of forward-looking SMEs.