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.
