Protect your profits, cut your FX costs and hedge your FX risk

1. Benchmark your bank.
2. Use an intermediary broker to improve your rates
3. Be vigilant about hidden fees
4. Don’t underestimate the benefit of a good hedging strategy
5. Simplify your FX product purchases

01.
Benchmark your bank

Banks are all structured the same which makes them expensive and difficult to deal with. They have big overheads which means they generally charge a lot more. Comparing different market providers costs nothing, so as a client you have everything to gain by looking at what the market has to offer.

When comparing exchange rates & transfer fees it’s important to use real mid-market rates, updated in real time, so you know exactly what the margin is and what you are being charged. This way you can compare the rate offered with other FX service providers and see exactly what the saving potential is.

Remember it’s not just about the price. You should choose a forex provider who is strong in multiple areas, from price, transparency, number of currencies available, customer service, online platform, innovation and efficiency of service.

02.
Use an intermediary broker to improve your rates

Intermediaries do exist. They sit in between the client and the bank and fulfil a valuable role in the market competitive and efficient. Intermediaries like FX-Pro for example are authorised FSP’s and work closely with the support of smaller Tier 2 Banks.

Foreign exchange like any business is about volume, the more you change the better the price you get. Most SME’s don’t have the volume needed to be able to negotiate better rates with their bank… that’s where intermediaries come in. They transact with hundreds of clients; this combined volume gives them access to preferential exchange rates which they pass on to their clients!

03.
Be vigilant about hidden fees

The costs for the service are not always transparent. To know what you are paying, consider the following factors:

1. Dumping In foreign exchange many banks & businesses are caught out by a practice called “dumping”, where unbeatable exchange rates are offered initially to attract customers and then deteriorate over time without the client’s knowledge.
2. Selective Exchange Rate Adjustment
   
   Ensure that you get an exchange rate upfront. If you are making foreign exchange payments through your branch, then more than likely, you are only getting confirmation of the exchange rate two days later. This gives your bank the flexibility to benefit from improvements in the exchange rate without passing on the saving to you.
3. Commission & Fees The commission and transfer fees vary from bank to bank. In most cases, the fees are based on a % of the amount being transacted. If your deal volume increases, the cost of your transaction could increase substantially. Choose a provider who offers a flat transparent fee structure.

04.
Don’t underestimate the benefit of a good hedging strategy

All businesses, large and small, with exposure to international currencies can find it challenging to manage foreign exchange risk. Transaction risk occurs as a result of timing differences between contractual commitments and actual cash flows. Managing transaction risk is relatively straight-forward with financial instruments because each transaction is clearly definable and mostly short term.

The Foreign Exchange market moves constantly with exchange rates changing every second, 24 hours a day, five days a week. As the market moves, the value of your payment or transaction will change and could potentially go up or down, this is where your risk lies!

It’s a common misconception but the aim of
currency hedging is not to second-guess
what the exchange rate will do; but rather
to protect the business against the
possibility of adverse movements.

Many small businesses don’t hedge at all.

Often this is because they:

• use a bank to transfer funds and the bank isn’t geared to offer this kind of service,
• don’t understand hedging products or how to use them correctly,
• they don’t fully understand how exposed they are,
• they don’t have access to the information needed to make a proper decision, or because they don’t have the cash deposits required to secure the forward contract.

Instead they build a buffer into their pricing to protect themselves against exchange rate fluctuations. While the buffer is ultimately designed to absorb fluctuations in the rate and protect the business from having to make regular price adjustments, it isn’t a hedge and it won’t protect your budget or profits.

The best way for SME’s to hedge is to use a Forward Contract. Forward contracts are easy to use, quick to implement and are specifically designed for reducing or eliminating risk on future dated transactions.

05.
Simplify your FX product purchases

Expanding overseas is a great way to develop a business, however it is important that small business owners think clearly about the steps that they need to take to ensure the move is as profitable and risk-free as possible. It’s easy for small business owners to forget the issues that may arise when it comes to making and accepting foreign payments.

With currency values constantly fluctuating and often high costs involved, SMEs are at risk of potential cash flow disruption, as they conduct business across borders and in different currencies. With the right FX management techniques, SMEs can avoid significant financial losses and unnecessary costs.