There are practical steps firms can take to minimize the risks and exert a good level of control over foreign transactions.

Whilst the Government is encouraging businesses to boost cross border trade to help grow the economy, many SMEs are, understandably, lacking the confidence given the volatility of the currency exchange markets, in particular, in the Eurozone. However, there are practical steps businesses can take to minimize the risks and exert a good level of control over foreign transactions.

First it is important to separate the two processes – Foreign Exchange (FX) and international payments. FX is the process of converting one country’s currency into another country’s currency in order to complete a transaction. International payments is the process by which the transaction takes place.

Ideally, SME’s need to find a partner who will manage both processes cost-effectively and efficiently. Incoming and outgoing payments are the life-blood of organizations. Finding a provider who can do both FX and payments seamlessly at the right cost can have a significant impact on bottom line profitability.

Foreign Exchange

First looking at FX, market rates move by the second, dependant on information fed into the market, i.e. country interest rates, GDP figures, house prices, manufacturing output etc, all of which affect the price of currency exchanges.  Much of this market information is delivered on set days and times during the week or month and impacts the strength of individual currencies. As a consequence, FX Market rates of exchange can move very quickly and over a day the difference in value can be considerable.

As a consequence, it is vital for businesses to work with a partner with a clear understanding of market information. In this way businesses can be aware of when information coming to the market will affect their specific currency pair, enabling them to make an educated decision on when to transact rather than a blind trade.

Businesses can work with a current banking partner, a specialist broker or a bank that will allow them to use their international FX desk without being a corporate customer.

It is worth noting that the customer facing side of a High Street bank may not be able to book orders from live market prices, but may be given a ‘day sheet’ with rates adjusted to protect the bank from losses during the time the customer facing personnel will take to feed the order, to the international dealing teams. This can mean that the rates can have margins of anything from 0.5 – 4% added.

In contrast a broker or specialist bank will enable businesses to have access to rates that move in line with the market with less margin attached.

International Payments

There are a number of factors to consider when selecting the provider and transaction process for international payments.

Look carefully at the time and costs involved which must be borne by the business and their suppliers. For example, high street banks send electronic transfers which can add to the time and cost of payments. Check what bank charges may be levied. It is possible to avoid fluctuating costs by using a supplier that will fix payment costs.

Error rates are a serious issue in international payments. Help prevent lost payments and extra charges by ensuring the provider conducts pre-emptive error checks as a matter of course. Also check references can be added to payments so that they can be traced easily. If using a broker, check they don’t transmit payments to a bank as this can increase the risk of errors.

In instances where payments do go missing, good customer service comes to the fore. Look for a provider that requests beneficiary data and offers a dedicated contact, not just a call centre.

Finally, when it comes to incoming payments, ensure the provider is able to provide notification of incoming funds and immediate notification of receipt and expedited clearance of cheques/drafts without loss of value.

In summary, there are a number of issues to consider when conducting overseas trade. SMEs need to protect their profit margins whilst maximizing their opportunities to trade internationally. Some initial investment in time researching the options and costs for their business will pay dividends in the future.

Source:  Tony Wilson – R. Raphael & Sons plc (dba Raphaels Bank) via SME Web – atalink.com