Oriana Marcolongo is the ecommerce partner manager at Currencies Direct. Currencies Direct are Currencies Specialists and Oriana is very experienced at explaining the the technical side of this area via webinars etc to ordinary business people.
Why do we need to think about Currency as small business owners?
Cross-border trade is the norm now, so small business owners do need to think about currency. If you look at the business cycle, there are three key stages where it has an impact.
The first stage is that it affects the price of buying stock from overseas which will determine the cost to the business. The second part is when you’re selling products. The foreign exchange rate will determine the margin you get from your sales. Thirdly is when you need to convert those profits back into your home currency.
Small businesses are particularly vulnerable to tight margins and can mitigate the FX risk by using a currency specialist like Currencies Direct
At what point should a company start looking at FX when considering to trade overseas?
Oriana sees this as two key areas where a company should look at this.
One is at the strategic level. Business need to decide which markets they want to sell into, and currency’s a factor. So if a market is weak, they might pause selling into that market for a while or decide to look at other markets that will be more lucrative for them.
The other is at a tactical level. Companies need to consider currency from the planning stage. If they’re trading and source stock again, the FX cost will drive the cost of the products, and directly affect the profitability. If they are selling solely in foreign currency, then the cost of converting the sales could be a concern as well as the change in revenues due to the moving exchange rates.
Since Brexit, sellers in the UK have lost buying power in China since the GBP has lost quite a bit of value to the USD. Before Brexit, £1 would get about $1.48. Immediately after the vote, it would only get about $1.33. Recently, every £1 we exchange gets us just $1.22. Now, when we go back to the supplier to re-stock, it going to cost us a lot more.
Can you give me any tips on reducing my foreign exchange fees in the global marketplace? I want to expand my business internationally, but we are worried about the cost of foreign exchange.
To give everyone a bit of silver-lining, when you sell in the US, you will be making more money back.
In terms of foreign exchange fees in global marketplaces, when you sell internationally, you need to bring your money back; there is a conversion cost. Using a Currencies Direct collection account, you can cut your exchange fees in half. It works especially well if you’re selling into the Eurozone, US, or the UK. It’s free to setup and account and you can be up and running in 48 hours.
Currencies Direct will assist you in getting the profits you earn in foreign market, back into your home currency. So if you’re selling in the US, they will help you get it back into GBP.
Is it possible for me to pay suppliers through Currencies Direct? If I’m selling in the US, and I want bring the dollars back to the UK as dollars, that way I can pay my suppliers in USD and stay in the dollar economy.
If you want to pay your suppliers through your collection account, the money will first have to go back into your bank account before they can be passed onto other suppliers. Their account managers can help you with this to make the process quick and efficient. You can pay suppliers directly through Currencies Direct, or you can do that through your own bank account.
How can we maximise US dollar sales when repatriating them to the UK?
There is a cost with repatriation which will affect your entire sales turnover. So in order to maximise you USD sales, they recommend setting up a collection account, which will save you money. On Amazon, you will be looking at around a 4% conversion rate, they are about half that. If you’re trading £100,000 and saving 2%, that’s a substantial amount.
I’ve noticed lately, that with the uncertainty of the pound, it can fluctuate substantially in a short period of time. What are the main tools to help protect your profits from foreign exchange movements?
There are simple tools that will help you with this. One of them is called a forward contract. This enable you to fix exchange rates you see today, for use later on. If you see that the dollar rate is really low, you can contact your account manager and buy a lot of dollars today and use them by the end of January.
How do forward contracts work? We’re placing an order for about £5,000, about $6,000 at the moment. We’ve split it, like you normally would, 30% down payment and 70% after the production period. In this example, if you wanted to lock down the exchange rate for the whole deal, how would you go about doing that?
There are three elements to a forward contract: the amount, the rate, and the time. For this, you would call your account manager. Tell them that you want to lock in the rate of, whatever it is today, 1.22, for example, and purchase $50,000, or for our example, $6,000, and that you finish the payments by the end of the month. They may ask you to put down a small deposit today to secure that rate. Then you would need to make the final payment at the end
To give an example of that looking at pre-Brexit. Let’s say you placed an order with them on 1 June for €10,000 and you wanted to use them by 10 August. The rate had dropped massively by that point. If you had waited, the products cost would have gone up by about 15%. By securing the rate pre-Brexit, you would have saved significant capital.
Is the contract between me and Currencies Direct, or the person I am ultimately getting the money to, i.e. the Chinese supplier?
The contract is with Currencies Direct, not with your supplier.
Then, in theory, I could exchange £10,000 to $12,000, or whatever it is, until July of next year, and effectively keep that money on hold, and when I exchange it, it will be at that price. Is that how it works?
Yeah. You will pre-agree with your account manager what the time-scale will be and how/when you’re going to pay it. As long as you have the rate, the amount, and the final date secured. However, you may not want to hang on to it that long.
Let’s say I wanted to exchange $50,000 at the current exchange rate, say 1.22, and I wanted it to go until the end of January, would that enable me to send it to any Chinese supplier that I want, assuming I’m paying them in USD?
As long as it goes back into your bank account, your account manager can work with you to get that done. That is one of the benefits of working with Currencies Direct, you have a dedicated account manager that will walk you through any process so you’re not alone at any stage. There are a lot of compliance issues that their account managers are experts in, that can save you quite a bit of hassle and legal issues.
Are they worth using for small orders, say a few thousand pounds or a few thousand dollars?
Realistically, it’s not worth doing for less that $25,000, but there is no reason why you can’t. Your account manager can give you some guidance.