The coronavirus crisis is merciless to everyone and everything, foreign currency exchange (FX) markets included. A small business that wants to survive in these circumstances needs to be aware of FX fluctuations. Moreover, it needs to reduce the risks of these changes tanking the business itself. That is a real possibility to anyone dealing globally these days. But luckily, today there are services that can solve this problem effectively.
Volatility on the FX Markets in the Wake of COVID-19 Crisis
The COVID-19 pandemic made a tremendous impact on the world, especially its economic aspect. FX markets were shaken greatly because of the crisis, and volatility there continues. For example, the Pound Sterling has fallen by 15% against the US Dollar and multiple currencies of developing nations have outright crashed.]
Being the world’s reserve currency, the USD is still standing strong. However, with the second wave of the virus threatening to tank the US economy, even this currency might fall.
This situation destabilized the entire FX market making all predictions for this year obsolete. Moreover, it’s almost impossible to make any kind of reliable forecast even for experienced traders. As small business owners are rarely professional in FX trading, they are at an even greater risk.
The majority of small businesses today must be aware of FX rates and changes in them. As many companies need to make and/or accept overseas payments regularly, currency exchange is an essential factor for business survival.
The recession caused by the 2020 crisis is likely to last a long time, so volatility will continue. Therefore, a company that wants to avoid huge unplanned losses has to compare foreign exchange services for businesses. Monitoring FX rates is not enough as one needs to use data from analytics and hedging tools to protect their business from fast foreign currency exchange rate shifts.
Why FX Rates Matter for Small Businesses Today
1. Small businesses benefit greatly from going global
A small business today should go global to be great. There is no way around it. Competition is high in all industries. Therefore, businesses that aren’t restricted to a single area by their very nature should expand to reach more prospects.
Also, the level of globalization in the modern world is unprecedented. International shipping and payments are affordable, if you do them right. Therefore, they are no longer restricted to large corporations. As such, a small business has a good chance of building a dedicated customer base overseas compared to locally.
2. E-commerce is at an all-time rise
The COVID-19 crisis is a challenge the world has never seen. It impacted every business and many smaller companies suffered greatly from it. However, for all the economic damage the pandemic did, it also boosted the e-commerce industry.
Online shopping has been rising in popularity rapidly even before the pandemic. However, due to lockdowns, online sales have already jumped by over 300% in some industries. Moreover, this interest in e-commerce isn’t going to go down anytime soon, if ever.
Online sales won’t drop in numbers simply because the world is currently under threat of the second wave. Therefore, if the virus strikes again, lockdowns will return. As such, e-commerce will again become the only way to purchase anything of value. With so many people turning to this method of shopping, it’s unlikely that they will go back to brick-and-mortar stores in the future.
All things considered, becoming a global online seller is the best chance for any retail small business to survive today. And in this case, FX rates will become a major consideration for the company.
3. FX volatility is too high a risk
One of the main reasons why going global is a risk for any business is FX volatility. At the moment, that volatility is higher than usual. And this instability will continue for some time due to the global economic recession.
Any small business that wants to accept payments from customers overseas or pay foreign suppliers needs to understand FX exposure risks. Foreign currency exchange rates can shift drastically overnight and take the business from black deep into the red with this single change.
Therefore, if a business needs to make international money transfers, it needs to use different methods of risk mitigation.
4. FX rates can make or break a small business
Global small businesses have a small profit margin. That’s because international logistics, certifications, etc. add up to make international selling expensive. Long-term benefits of going global outweigh these issues, but the fact of a small profit margin remains.
As foreign currency exchange rates changes can be extreme, they can eat up this profit margin. Moreover, they might make the deal cost the business more than it will receive from a customer. The best way to prevent this is monitoring the economic situation affecting the FX market carefully and using hedging tools.
5. Mastering FX hedging can be extremely profitable
FX hedging is not only a way to reduce the risks inherent to global trade. It’s a tool a small business can use in order to make some extra money. Securing favorable FX rates, especially during times of great volatility, can increase one’s profit per deal significantly.
However, this will only work if one makes the right hedging decisions. Therefore, it’s essential to use high-quality professional advice in these matters. But even then there is a risk that you won’t get the best deal as the micro and macroeconomic situations change.
Challenges of Foreign Currency Exchange for Small Businesses
One of the biggest challenges for small businesses that want to go global is payment processing. The most popular money transfer methods for retailers are so expensive, they eat up your profit margin without even adding the FX volatility risks. For example, PayPal transfers will cost you no less than 3.5% of every transaction.
And remember that FX rates usually aren’t fixed. Therefore, this transfer can cost even more because of the instability caused by a recession.
How to Make FX Transfers and Conversion Cheap
The best solution to the problems of expensive transfers and FX volatility is using money transfer services that are cheap and offer hedging. Traditional money transfer providers (banks and companies like Western Union) are both expensive and reluctant to offer any meaningful extra-services. For example, hedging tools from banks are only offered to specific clients, usually the biggest.
However, today any small business can use online money transfer companies to make and accept payments quickly and efficiently. These services are renowned for their very low fees. Some of them even use fixed and low FX margins. This further reduces the cost of the transaction. An FX margin is the surplus you pay over the FX rate. Having this particular factor fixed as a low level means that online transfers are the cheapest transactions you can find today.
Due to the rising globalization, the need for cheap international money transfer services has increased. As a result, the number of companies offering these services has also increased. But you need to understand that not every company is well-suited for businesses specifically.
The majority of such service providers mostly focus on global investors and remittances. People involved in the real estate industry also use these companies if they purchase or rent properties abroad.
The leaders among online money transfer companies for small businesses today are:
- Moneycorp: an industry veteran with a wide range of services that supports 120 currencies.
- WorldFirst: a company best suited for e-commerce and supporting 121 currency. It’s expanding rapidly.
- OFX: one of the most trusted transfer providers specifically suited to business needs. It supports 55 currencies.
Tips for Choosing the Best Money Transfer Company
When looking for a money transfer company for your business you need to remember which factors matter most. The affordability of the service is important. However, all top companies will offer cheap transfers with comparable fees. Therefore, the cost shouldn’t be the deciding transfer for you.
Instead, you should focus on extra services that can benefit your business most. Hedging tools are a definite must-have for such a company. Forward contracts, in particular, are something you should look for in a money transfer service. This tool alone can effectively solve the problem of FX risks. It will allow you to secure a good FX rate for up to a year. Therefore, your business might avoid problems of FX rate shifts completely.
However, to use hedging tools well one needs to understand the FX markets. This is a skill that requires years of study and diligent practice. As a small business owner who isn’t secretly an FX trading genius, you’ll also need to use the company’s currency counsel service. Look for money transfer providers that can help guide you in making the best currency decisions.
In Conclusion: Small Businesses Need to Be Extra-Careful with Currency Exchange
Many small businesses today need to use foreign currency exchange regularly. Even if you don’t need it right at the moment, now is the time to go global. Therefore, the need for international money transfers should arise soon. When it does, FX volatility will become a huge risk. Using online money transfer companies and hedging tools they offer can literally save the business. One needs to choose this kind of service provider carefully. And remember that the best FX rates at the moment do not necessarily mean the best service.