The Greek financial crisis is posing a risk towards SMEs importing from or exporting to Europe. With advice from an industry expert, find out how you can manage currency effectively while exporting goods abroad.
Alex Edwards, head of corporate desk at money transfer firm UKForex gives some critical advice on how businesses across the UK can make a profit when trading within the Eurozone.
What are the risks posed by the Greek crisis?
If Greece leaves the European Union, the Euro will experience significant volatility. Small businesses with clients or suppliers across the channel will need to act quickly to protect their bottom line. It is vital, therefore, for SMEs to develop a robust foreign exchange (FX) strategy.
Any sudden movement in exchange rates can damage a company’s profit margin. A fall in the value of the Euro will squeeze the bottom line for exporters, while a rise in the value of the Euro will make imports from Europe more costly.
Small businesses that intend to export goods abroad within the next 12 months may start to rethink their strategy if the currency market continues to be unstable.
How can small businesses manage currency effectively?
A forward contract is a hedging tool that allows you to lock in a current exchange rate now to make a transfer at some point in the future. It provides protection against any unfavourable currency movements down the line.
You don’t need to hedge all of your currency exposure – in leaving some money to one side, you can take advantage of any upside in the value of the currency you’re holding, should it rise in value against the currency you need to convert it to.
This can be done by agreeing a spot contract when the rate is in your favour. A spot contract occurs when buying or selling a commodity, security or currency for settlement (payment and delivery) on the spot date, which is normally two business days after the trade date.
Depending on the risks you’re facing, you can adopt a portfolio approach by using a combination of spot and forward exchange contracts to balance your foreign exchange risk.
If you can foresee when you’ll need to make a payment overseas, consider taking advantage of limit orders.
These allow you to arrange for your transfer to take place when the exchange rate reaches a certain, favourable level. A currency specialist will make a payment on your behalf when rates reach your designated ‘limit’, so you don’t have to watch the markets yourself.
For small businesses that intend to export, it would be wise to increase your prices. In some cases, you may even consider pricing your goods in pounds, thereby passing on the FX risk to your customers. This will be hugely dependent on the products you’re selling and your target market.
You’ll also need to be wary that any rise in the value of the pound will make your products more expensive overseas and potentially put off customers.
Shop around for better rates
A bank will typically quote you rates between 3-5 per cent from the interbank exchange rate. Try getting a few quotes from established, FCA regulated foreign exchange companies.
Ask questions around pricing transparency and rate consistency before you do sign up, as continually shopping around for better exchange rates is a huge time-sink.