Debunking currency exchange confusion
Posted Under: News
You are a business that imports. Maybe, raw materials which you then turn into magnificent products that you then sell to U.S. consumers. It may well be you have international clients and therefore export certain goods.
Whether you import or export we’ll wager if you’ve heard about currency conversion you shy away from it for any one of the following reasons:
- It sounds confusing.
- It’s risky and it therefore must be expensive.
- You don’t need to worry about currency volatility because you buy and sell in U.S. dollars.
- Your cross-border payment volumes are too small, it’s only for large global companies.
- “This is the way I’ve always done it, and nothing is going to change my mind”.
We’re here to tell you none of the above is true. Relatively speaking. If a neurosurgeon tries to tell us brain surgery is simple then we’re going to call BS on that. But, unlike the training required to poke around inside someone’s head, currency conversion and hedging really is as simple as….riding a bike.
Now, if you struggle to ride a bike we’d say you should still continue to read on. If 1-4 above resonates you should take a few more minutes to read on. If #5 is you then it’s likely you’re a lost cause and we suggest going back to work, continue using bad practices, and keep your head buried in the sand blissfully unaware of missing out on revenue opportunities, protection of your net profit, and complete denial of the risks you have in your business.
Apologies if anyone is offended by the last paragraph but if there’s one thing we’ve learned in the decades we’ve been involved in currency payments it’s that you can only help those who want to be helped, and there’s plenty of people out there in suffering businesses who are eager to be the hero to their board and senior management.
We get it, we do. If we don’t understand something it’s all too easy to turn away from it. Our co-founder, Mark Ridley, claims to be a fan of the guitar but we can tell you now that despite owning two guitars for 20 years he can only play an A. Why? Because he thinks it’s confusing and therefore doesn’t want to take the time to learn the basics. He wants to be Hendrix, from day 1.
He’s a great advice giver. Lousy advice taker!
Foreign exchange and currency payments on the other hand is something Mark’s 9-year-old son understands. Probably helps to have a dad in the industry.
If you are importing and paying global vendors in dollars then you’re halfway there. Paying to a beneficiary in their currency or in dollars usually takes the same number of key strokes. In fact, probably less in currency.
Asking your vendor, at your next order, for a price in dollars should be followed with the simple question “…and can you also please quote me in your currency, too?”.
That’s pretty much it, for now. There’s NO commitment for you to pay in their currency. It’s merely an option to do so at this stage.
When you receive the currency amount you send that on to us, along with the date you would need to make the payment, and we’ll tell you what the dollar equivalent would be.
Here’s the really, really easy part. You look at the two amounts and we’ll play a game of ‘which one is lower?’
When you come with the quick conclusion that the FX dollar value is lower, we will then fix the exchange rate there and then. You now have a fixed, g’teed dollar value, payable on the same day you would ordinarily pay your vendor. Only, lower.
Confusing? Or did you fall off your bike again?
Even if it is still confusing you must admit paying a lower amount for the same imported items feels kinda good, right?
OK, so you still have a dollar figure for your cash flow forecast, you are paying out on the same date you normally would, and the amount is lower (probably by 5%).
Risky & Costly?
No and no.
We could move on to the next section but let’s run through why.
There’s inherently way more risk in you buying from a global vendor and paying in dollars than there is paying in their currency.
When you ask for a price in dollars that price is based on the prevailing FX currency market rate. Therefore, when you ask your seller for another order, the following month, it’s likely going to be a different dollar value if the market has moved sufficiently.
Your German vendor wanted €100,000 for their widgets and the rate their bank quoted them was (I’m keeping the rate simple, and not basing it on current rates) 1.10 meaning their starting value to quote you is $110,000.
But, you’re paying them in 30 days. They don’t want to receive the payment and convert to euro at 1.15 because then they’ll only collect €95,650.
So they ‘pad’ the amount by 5% to cover the FX risk you’ve given to them, and so the quote you receive is for $115,000.
All you see if the amount and all you think about is whether it’s affordable. We’ll wager you’ve never thought about how it was derived.
Next month you ask for a price and the rate the bank quotes your vendor is 1.15 which after adding their padding results in a quote to you of $120,000.
So, if there’s risk it’s NOT in the currency exchange you’ll have with GreenShootsFX. But, risk does exist in your current business model and you have never thought about it before.
What if you knew what you annual payables were, roughly, and you then hedged each month for, say, the next year?
Ask for quotes in euro and it’s likely going to be €100,000 each and every time so today you could fix the rate for next month, the month after, month 3, months 4…5…6…….
It’s likely the rate fixing will be in the region of 1.07 through us meaning each month you’ll pay $107,000.
The cost? Zero. No fees. No premium. No charge.
The risk? No longer there.
You now have a dollar value for your cash flow forecasting whereas before you wouldn’t have a clue what your vendor was going to charge one month to the next.
What we’ve just answered there, too, is Concern #3. Buying and selling in dollars creates a currency risk you can’t see, therefore you can’t manage it.
Also, payment terms are usually short dated when you receive a price in dollars. Ask your vendor whether you can extend payment terms by 30-60 additional days if you pay them in their currency.
You have now improved your liquidity position and no longer have to draw down on bank facilities, or keep cash idle.
We’re too small.
Rubbish! Your business and it’s survival is important enough for you to want to get out of bed in the morning and so it doesn’t matter if you’re paying $50 million or $5,000 per month. Protect yourself, your net profits, and protect the longevity of your business because you have vendors, customers, employees and family members relying in its very existence.
We process transactions of all sizes. You would be surprised at some of the smaller values!