What Small Businesses Need to Know About Foreign Exchange

For many small to medium sized businesses, there comes a point when dealing with international customers and suppliers requires thought and processes regarding the foreign exchange of currencies.  For example, a US firm selling to a UK customer may mean that the UK pays the US in British Pounds in which the US firm must exchange into US Dollar. Whenever there is a need to operate on an international scale, there is the need to exchange currencies and therefore are considerations that SMB’s have to take into consideration.

The foreign exchange market is massive, worth approximately $4 trillion USD every single day and traded by big financial institutions and professional forex traders. Hundreds of different currencies are traded with price fluctuations happening every second. To the SMB this means that they have to ensure that if they are exchanging foreign currencies, they have researched:

The Spread – Forex brokers quote two different prices for currency pairs: the bid and ask price. The “bid” is the price at which you can sell the base currency. The “ask” is the price at which you can buy the base currency. The difference between these two prices is known as the spread.

The Fees – What fees are being charged by the company doing the exchanging. Is it a flat rate? Is it a percentage?

Regulation – Is the company regulated? Does it offer protection for your monies and if so, how much?

As more and more small businesses move into international markets, business owners are discovering that the daily exchange rate changes can and are affecting into their profits. 

Traditionally, it was always the banks or specialist forex service providers that small business owners turned to for their foreign exchange needs. However, the last decade has seen both the advancement of technology/internet and the relaxation of forex regulations. This has spawned a plethora of websites and companies around the world offering foreign exchange services. The increased competition has been good for the consumer and brought fees down and provided more choice, along with more flexible forex services. However, as we recently saw with American Express $1.6 million refund to SMBs for less than ethical practices, even the biggest banks and financial service providers need to be researched and monitored carefully.

In today’s global village, SMBs cannot ignore the importance of getting their foreign exchange processes right. It may not seem to be the highest priority for an expanding SMB, but it is something that simply can’t be ignored. The consequences of not doing the proper research in foreign exchange services and needs will have an impact upon the profit and loss of a company. 

Alex Hamilton