Making the most of your money
07 February 2007
Electronics is a global industry, which means trading in many different countries. Bob Brown, Marketing and Sales Director at Capital Currencies Ltd, asks: “Foreign currency – are you getting a good deal?”
Anyone in business who imports from or exports to a different currency zone is exposed to the risk of fluctuating foreign exchange rates. The wrong rate could make the difference between a profit and a loss on the transaction. So, the key question for such people is “Am I getting a good deal on the exchange rate?”
“Yes, I’m getting a good deal because my bank gives me corporate rates of exchange.” is something I often hear. But what is a corporate rate and how do you know whether it’s any better or worse than any other rate being offered in the market?
“But I don’t have a foreign currency need because my bank makes a transfer into or out of my sterling account.” is said by many. However, those making the statement all too often have little or no idea of the cost of that service or whether they are getting a good deal. On the contrary, they regard foreign currency as an unfortunate necessity of doing business abroad and see the whole process as complicated and daunting – something which they are happier off-loading onto their banks. The resulting charge, whatever the price, is to them an inevitable consequence of doing business internationally.
“But I invoice my customers abroad in sterling, so I don’t get involved in foreign currency!” is, on the face of it, true for some. However, if the UK seller chooses not to get involved with foreign currency, the same cannot be said of the overseas buyer who has to obtain sterling in order to settle the UK sellers invoice and the price paid for that sterling will have an impact on the buyers profitability.
For some buyers, exposure to foreign currency risk could become one problem too many. At a time of increasing market competition, for the seller to manage the foreign exchange risk, rather than passing it on to the buyer, could be seen as adding value to the transaction and may well make the difference between keeping or losing the customer to a competitor who is prepared to go the extra mile.
For all those who need foreign currency there are two important questions:
What does my foreign currency cost me? and
Am I getting a good deal?
The answer to the first question provides the starting point of the answer to the second, accepting that an additional and critical consideration will be the quality of the service you get!
Before actually buying any foreign currency, you must identify a supplier and in that process, there are a number of key points to bear in mind.
1. Foreign currency is a commodity which is bought and sold in the market place and is subject to the usual pressures of supply and demand – with the foreign exchange rates constantly fluctuating. Whilst foreign currency suppliers buy in the same market, they sell to their clients all at different rates, reflecting their individual circumstances. These differences between suppliers can be significant and amount to several percentage points. For example, on a transaction of £100k , the difference between a good and bad rate could be 5% or £5k. So, shopping around is well worth the extra effort!
2. But beware – when comparing rates, make sure you are making a like for like comparison. Because market rates are changing second by second, it is important that any meaningful comparison is undertaken within as short a timescale as possible. Additionally, ask about any extra charges you may incur, such as transfer fees or commission.
3. The size of the transaction will influence also the rate of exchange. In the main, the greater the amount, the better the rates.
4. It is often said that business is not done between companies but between people and that good personal relationships are essential for successful company relationships. Never was this more true than in the foreign currency market because, as the trading of foreign currency is not regulated by the Government, it is your responsibility to ensure that any supplier you use is reputable and trustworthy. In this context, you should carry out a simple security check by asking your bank to undertake a free status enquiry about the supplier to establish some basic credentials.
5. It is always worth remembering that, when considering potential foreign currency suppliers, there are alternatives to the high street banks. A good independent supplier can often give you the best exchange rates. In using an independent supplier, you are not required to change your bank which will continue to provide a wide range of financial services as part of its on-going relationship with you. So whilst you may wish to still buy your groceries from the supermarket, there is no reason why you should not buy your meat from the local butcher.
6. But a word of warning! Beware of unscrupulous suppliers who use misleading rates to entice you into giving them your business. If the transaction is not done at the time of the quotation, the actual rate you receive may be far less attractive. In this context, it should be noted that, before you can trade foreign currency, you will have to register with the supplier in compliance with HMRC money laundering regulations. Registration does not oblige you to trade but you cannot trade unless you are registered.
7. When registering, remember to read the “small print” in the terms and conditions so as to avoid any unpleasant surprises. Also, understand each stage of the transaction process. For example, it is important that currency bought on your behalf is held in an escrow account pending the transfer and clearing of funds. Insist on timely confirmation of both the contract terms of purchase and the completion of the transaction. The latter point is particularly important as the sooner you become aware that the currency has been transmitted to the agreed destination, the sooner you can advise your overseas suppliers or shippers.
8. As a general point, it is always advisable to ensure you have sufficient time to organise your foreign currency transactions in order to avoid the worry and possible complications of leaving it to the last minute. Lack of adequate planning can mean that events are controlling you rather than you are managing events. In these circumstances, you may have to buy in the spot market when exchange rates are not advantageous or timescales have to be adjusted. On the other hand, planning ahead can give you other trading options to more effectively manage your foreign currency needs.
Foreign currency is a rapidly changing commodity market and as such there can always be that nagging worry that you have bought or sold at the wrong time/price. However, by following a few simple rules it is possible to bring more efficient currency management into your business. So you will know what your foreign currency costs, in real time, and you will know whether you are getting a good deal. But, more importantly, you can make savings and those benefits will be reflected in an enhanced bottom line.
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