When your business wants to grow through international trade – whether as an importer or exporter – understanding how to protect your business from exchange rate risk and how to trade in foreign currency can be daunting. In a recent survey by the Department for International Trade, 57% of businesses said that increased financial risk was a key barrier to their exporting plans1. But international trade offers clear benefits for businesses, so getting comfortable with foreign exchange or FX means you can maximise new opportunities.
Trading overseas in different currencies does increase business risk. The size of the risk will vary, depending on the currency involved, the transaction value, what your time horizon for making or receiving payment looks like, and the prevailing market conditions. “Movements in currency can eat into profit margin and even cause a loss, if businesses ignore that risk, either because they don’t understand it or because they think it’s too time-consuming to address,” says Brandon Roberts, Head of Europe Digital and Transactional Corporate Sales at HSBC.
However, there are a range of solutions available to help you understand and reduce the risk, and HSBC’s award-winning payment and treasury platforms are able to deliver them seamlessly, reducing the time and effort you need to trade internationally. “Understanding the implications of trading overseas and how that affects your business is important. The right solution will depend on the circumstances of your business and the nature of the transaction,” says Brandon, “but understanding what options are available can help the decision-making process. Even if you decide to do nothing, it should be an informed decision.”
- Do nothing – the first option is to simply make the international or FX payment to a supplier, for example, or between your different currency accounts using internet banking. To do that, you would need funds available in your account, but you would be exposed to any movement in the FX rate up to the point that you send the payment. That means that if you’re on 60- or 90-day payment terms, and the FX rate moves during that period, you will be exposed to that change.
- Spot FX – this solution gives your business the flexibility to buy or sell currency whenever you’d like to, across your currency accounts. If, for example, you have a dollar invoice due in 60 days’ time and you have the funds available today to purchase those dollars, you might want to buy them and hold them in your dollar account until the payment is due. Alternatively, depending on your tolerance for market moves, you may decide to buy them at any point between now and when the payment is due, or you could even purchase a percentage now and a percentage later. That way, you have flexibility over the timing of the currency purchase, to benefit from favourable movements in the exchange rate to improve your margins, or to limit losses from negative moves.
- Forward contract – also referred to as FX hedging, this solution allows your business to agree to purchase a set amount of currency at a specific rate today, with the currency delivered to you on the required date. It provides certainty over exactly how much that FX purchase will cost, and you don’t have to have funds available today – just on the settlement date. This provides a solution that can help protect your business against any adverse movement in FX rates and can help you plan your working capital, but it does require a credit line to be agreed first. A downside of using forward contracts is that you wouldn’t benefit if the rate went in your favour.
“Depending on your business needs, these solutions or, indeed, a combination of them, can be effective at helping to mitigate your FX risk and are available on our online treasury platforms,” says Brandon. “As your business grows, more complex solutions become available, but for smaller businesses keen to reduce their exposure to currency movements, these options are reasonably straightforward and easily accessible.
“HSBC's strategy is to help your business grow and to assist in opening up the ability to trade internationally. By helping you to get comfortable with transacting in foreign currency and protecting you from risk, we can do that together.”