How SMEs can mitigate against volatile currency markets
Keith Miller, Senior Dealer at Western Union Business Solutions, the world’s leading non-bank business payments specialist, looks at how small and medium-sized businesses can take the edge off their exposure to volatile markets against the backdrop of renewed European uncertainty.
For many British importers and exporters, currency volatility is a big concern. A sudden shift in exchange rates, and a profitable deal can all of a sudden lose value, or in an extreme case, turn into a loss-maker. The financial troubles in Europe, for example, have caused much grief and worry.
So, the question is: how can businesses mitigate against all this uncertainty?
Quite simply, and as has been the case following several years of economic instability, small and medium-sized enterprises need to be financially-savvy. With such uncertainty in Europe, businesses need to remain in a position where they can continue trading internationally whilst not putting their own livelihoods at risk. This is where we at Western Union Business Solutions can help.
A lot of solutions exist to help businesses protect against market volatility, at least in the area of foreign currency payments. I work very hard with my clients to analyse and understand their businesses and what their foreign exchange needs are so together we can craft a solution tailored to fit those needs. Examples of what some of our clients consider include:
Forward contracts/FX hedging
SMEs could consider making a forward or future payment. This enables businesses to lock in international payments at a fixed exchange rate, so as to manage their costs and avoid being subjected to the summer’s volatile currency fluctuations. By fixing the exchange rates of their international payments, businesses will be in a better position to manage their outgoings, and will therefore be better equipped to cope with unforeseeable market disruption and other external variables. In these times of volatility, businesses should look to control as much of their financial transactions as possible; fixing the exchange rate eliminates a business’s exposure to FX volatility.
SEPA and direct payments
The Single Euro Payments Area (SEPA) was the payments integration initiative of the EU, designed to simplify bank transfers. The reality of SEPA has been somewhat marred by missed deadlines and delayed legislation, to the extent that there is still a lot of inefficiency when one eurozone country makes a cross-border payment to another eurozone country. By contrast, businesses based in theUKare able to make direct payments in the currency of their choice, at their chosen fixed rate.
The clarity and efficiency that stems from fewer bureaucratic hurdles is a luxury thatUKimporters and exporters should not take for granted. The ability to make direct euro payments at a fixed rate means that companies from the UK are far more efficient in making overseas transactions, and are competitively well-placed in comparison to their European counterparts when making international transactions. Overseas payments (such as remittances) will not be overly subject to delays andUKbusinesses will generally receive their payments on time, which will help with their own liquidity. Most significantly, international relationships will not be damaged through unnecessary red-tape disruptions; strong business relationships are vital in these days of uncertainty.
Other tactic that could help UKbusinesses to minimise the impact of the eurozone crisis is to consider additional or alternative markets when trading internationally. Increasing exposure to the emerging market success stories, such as Braziland China, would potentially benefit UK SMEs in the medium to long term. Indeed, one of the more significant announcements for international trade was made at the start of the year, when the UK Treasury confirmed the development of Londonas the leading international hub for trading China’s currency, the renminbi. Quite simply, this was a momentous decision that places both the UK and London as the go-to market for Western economies to come to when they want to do business with China.
Treasury officials are confident that the new partnership puts London in a strong position to be a major centre for trading the Chinese currency outside China and Hong Kong; they have forecasted that trade transactions settled in the Chinese currency would reach around a trillion dollars (£650bn) by 2020. The Government’s aim is for London to complement Hong Kong in becoming a major offshore centre for the renminbi.
This move has the potential to change the very landscape of international payments and will catapult UK SMEs into more global markets. In essence, it will make it easier forUKbusinesses to benefit fromChina’s exponential growth.
In short, there are three essential tips that UK-based importers and exporters can consider when they’re looking to minimise the impact of the European financial crisis on their business.
This article has been prepared solely for informational purposes and does not purport to provide any financial, investment or professional advice. It does not in any way create binding obligations on Travelex Global Business Payments Limited, a Western Union Company. Travelex Global Business Payments Limited makes no representation, warranty or condition of any kind, expressed or implied, in this article