How to minimise foreign exchange costs in business
Having a solid business model and a talented team are two key drivers of success, but a keen eye for the financial details is also vitally important to the bottom line of any company. If you are trading internationally with either suppliers, employees or customers overseas, it’s important to understand and minimise the costs of foreign currency exchange and global payments. Without paying attention to these costs, exchange-rate volatility and hidden fees can rapidly eat away at your profit margins.
Airwallex is a payments and financial platform that helps modern global businesses solve this problem and streamline their financial operations. In this article, we’ll outline the various costs that are involved in foreign-currency transactions, ways these can be reduced, and how Airwallex’s solutions can help.
Understanding the costs of foreign exchange
Foreign exchange (FX) rates are fluctuating constantly, thanks to changes like:
Inflation rates: Lower rates of inflation are correlated with a country having greater purchasing power compared to its trading partners, which affects FX rates.
Interest rates: Higher interest rates tend to attract foreign capital seeking higher returns, leading to currency appreciation.
Economic indicators: GDP growth, employment rates and manufacturing output reflect a strong economy.
Political instability: This can negatively impact the value of a country’s currency, as it can put off potential foreign investors due to increased uncertainty and decreased confidence.
Trade balances: Countries that export more than they import generally experience an appreciation of their currency.
It makes sense to keep an eye on the ups and downs of FX rates if you are a business operating across borders: overseas supplies and wages will quickly get more expensive if your home currency devalues.
There are also instruments to consider that help minimise the risk associated with currency fluctuations. Forward contracts allow you to lock in an exchange rate for a future date, and hedging strategies can help lower financial risk. Then there are multi-currency accounts, like that allow you to hold and manage funds in different currencies, putting you in control of when you exchange currencies, thereby reducing the need for unnecessary conversions, and giving you access to interbank rates when you do need to exchange currencies.
How currency exchange costs affect businesses
Businesses can be impacted by the costs of currency conversion and fluctuating foreign-exchange rates in multiple ways: when collecting money from customers, when paying employees, and when buying supplies, if any of these transactions happen across borders.
This must all be factored into the financial planning of an international company. Being aware of the factors driving currency volatility can help businesses avoid sudden hits to their profit margin. For example, if the company’s home currency falls in value, the cost of wages and supplies in other countries will rise. Holding funds in foreign currencies can help counterbalance this effect.
On the other hand, if a company’s home currency strengthens, these costs will exact less of a financial toll. However, the price of the business’s products may become less competitive in foreign markets, leading to a potential loss of market share.
Financial reporting can also be affected by fluctuations in exchange rates. The perceived financial health of the company may be impacted if the company’s home currency drops in value. By monitoring changes in FX rates, companies that hold money in multiple currencies can also make effective decisions about when to move money between accounts.
How to reduce the cost of foreign exchange
1. Eliminate unnecessary conversions
First things first. If you’re doing business across borders, but you only have the capacity to hold money in your home currency, you’re missing out. With an Airwallex Global Account, you can hold funds in multiple currencies, each in an account that operates as though you were a local of that country. This means you can collect payments from your international customers in their preferred currency and then spend those proceeds later in the same currency; for example, to pay global suppliers and employees. A domestic bank account, on the other hand, may forcibly convert funds in and out of your home currency with every cross-border transaction, incurring costly FX fees in both directions.
2. Hedge against currency volatility
The other benefit of a Global Account is the ability to manage the risk of fluctuating currency values by exchanging currencies at the exact moment when rates are most favourable. If you’re not in control of this, your financial team may be in for an unpleasant surprise when it comes to paying foreign suppliers, if the cost has suddenly spiked. By holding money in all the currencies you regularly deal with, you can move funds between the accounts so that you are always a step ahead of any potential devaluation.
3. Reduce fees when converting currencies
Airwallex offers interbank FX rates when businesses wish to exchange currencies. While most banks and financial institutions add hidden markups to the standard interbank exchange rate, Airwallex is transparent in its pricing.
4. Lock in FX rates in advance
With Airwallex, you can eliminate risk from cross-border operations by locking in FX rates in advance, based on the needs of your business. This is useful for companies such as online travel agencies which tend to process payments from customers in one geography and currency, then pay out to suppliers such as hotels and airlines in another. These companies can leverage Airwallex’s LockFX feature to lock in a fixed currency exchange rate while a customer browses their website. When the customer comes to pay, the fixed exchange rate will apply, ensuring the travel agency is never left out of pocket even if the real exchange rate has fluctuated.
If you’re looking to de-risk currency exchange across longer-term workflows, Airwallex allows you to lock in FX rates across 10 global currency pairings for up to 180 days into the future, thereby protecting your company against the risk associated with holding large volumes of foreign currency for an extended period.
Take control of FX with Airwallex
Airwallex can give your business the ability to hold and trade in multiple currencies, convert currencies at interbank FX rates, and lock in FX rates in advance. If you're interested in minimising the cost of foreign exchange for your business, click here to sign up for an account.
Tilly manages the content strategy for Airwallex. She specialises in content that supports businesses in their growth trajectory.