Corporate FX: What you need to know when sending money overseas and hedging

Small businesses often lose out when it comes to transferring money overseas. Here's how to level the playing field.

What do large international corporates have in common with smaller companies in the UK that have employees or property abroad? They all must do money transfers on a regular basis. The issue is that these companies may be paying dramatically more money on moving and repatriating funds than they could be. But that’s not all; they are also being exposed to unnecessary FX risks that can be drastically affect their business’ bottom line.

Small businesses and money transfers

Small businesses in the UK who transfer money overseas or collect FX payments from abroad are losing money because UK high street banks are using very wide spreads. Although this affects all businesses, small companies are suffering more: they are paying the worse rates, and a lot more volatile to rapid currency rates shifts.

Why is this happening? Small businesses don’t usually receive consultancy on how to send or receive money from overseas in order to reduce costs, nor do they have direct access to trading rooms or FX hedging tools. This is especially true when these businesses are compared to large corporations that trade millions every year, that have the financial knowledge inhouse, as well as direct access to the trading room of the bank and can fulfil orders quickly and for the tightest margins.

In these trading rooms, financial institutions use the same tactics honed from serving their clientele but for their own benefit. In other words, they perform strategic trading manoeuvres based on the risk or volatility of financial assets to increase their revenue.

Thankfully, it’s relatively easy for small companies to level the playing field, with the use of commercial FX firms for SMEs.

How is that possible? Check out the following benefits so you can see for yourself:

Benefits of commercial foreign exchange firms

These companies don’t just send payments from place to place; their work also involves timely execution, market monitoring, and continuous advisory.

Thus, their benefits include:

Smaller margins: For popular currency pairs, the default margins for private online clients are 1.5 per cent. However, when small businesses, that trade dozens or even hundreds of thousands every year, are able to negotiate and can reduce the margins to less than 0.5 per cent, a significant change to be sure.

Dedicated service: Every corporate client is assigned a dedicated account manager who understands your needs and can offer helpful advice that can save your company time and money, like the right time to send or receive funds, hedging tools (eg limit order or forward contracts). These companies also offer clients an increased level of flexibility, even if your business only trades thousands of pounds every year.

For instance, over the past five years, the Brazilian currency (BRL) lost over half of its value, going from a ratio of GBP to BRL of approximately 0.40 to less than 0.20. Another great example is highlighted in the case of the Japanese Yen (JPY). It was around 2012 when the currency lost approximately 40 per cent of its value from over 0.0080 to 0.0050.

A company that doesn’t make a thorough analysis of its foreign currency revenues, and doesn’t hedge (or take an investment position that could potentially offset any potential gains, or losses), nor understands the importance of currency forecast (by experts) cannot maintain its level of operation if it deals with volatile currencies in high volumes.

What to look for in a commercial foreign exchange firm

When small companies in the UK are performing their day-to-day operations, they will need to find a corporate foreign exchange brokerage that will increase revenue while minimising risks. To get the most bang for your buck, it’s important that you consider the following elements when making your final decision and performing a comparison:

Global reach: The company you have chosen must be able to trade with the currencies you currently make or receive payments with. It must be large and flexible enough to serve any future need that may arise for your business.

Competitiveness/liquidity: When a company has high liquidity, they can ask spreads/tighten their bid to get you improved exchange rates. Because of this, the level of liquidity is one of the most important factors that you must take into account when you are dealing with a commercial Forex company. In fact, if you choose the right company, it’s possible to save approximately £10,000 pounds on a £500,000 transfer.

Great customer service: Market advisory, timely execution, recurrent payments, stop losses, and alerts are all services that these companies offer. This will help you gain the time needed to focus on the core value proposition of your company. A corporate FX firm that has excellent customer service will keep you protected while you switch your focus to the operational part of your business.

Foreign bank accounts and online merchants: Although this service isn’t available for all clients, there are some companies that let e-commerce sellers create collection bank accounts overseas. What this means for you is that foreign currency payments can be exchanged for significantly better rates.

Making your final decision

When searching for the right commercial FX firm, you will undoubtedly be able to eliminate some options along the way. The obvious faults include companies like Azimo, which doesn’t handle business transactions and MoneyGram, which is immigrant remittances oriented.

Still, even after these eliminations have been completed, there remains a number of choices available. There must be hundreds of firms headquartered in London alone. These commercial firms’ offering is usually quite similar, as well as the pricing systems and margins applied, so it’s recommended to read company reviews and learn about the fine differences between them.

Further reading on currency exchange

Alan Dobie

Alan Dobie

Alan was assistant editor at Vitesse Media Plc (previous owner of before moving on to a content producer role at Reed Business Information. He has over 17 years of experience in the...

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