By its very nature, the currency market is unstable – but this doesn’t mean your business has to be. As an IT reseller, you’re likely doing a lot of buying and selling across borders, so will have contracts where you have committed to buy at a certain price and then sell at a certain price.
Unfortunately, international trade carries an inherent currency risk – there’s a strong potential for exchange rates to change between the time you’ve agreed the contracts and the time they are paid, especially if they are long term. The amount resellers make on international contract can be affected by even relatively small fluctuations in exchange rates, so this can be a real problem – both for your profits, and for any kind of coherent business planning.
To work out whether you’re exposed to currency risk, just think of the number of countries with which you trade on a regular basis. If you are buying computer parts from China, in renminbi, to sell to a buyer in Mexico, in pesos, you could lose money to poor exchange rates at both transactions. The more currencies a company uses, the more important and useful currency hedging can become.
Building a robust currency strategy creates an insurance against this, something especially relevant thanks to the recent crisis in the eurozone and the volatility of the Chinese currency in August. Sometimes it is better to hedge your bets and protect your interests.
Finding the best provider
It makes sense to use a range of currency products to hedge against currency exposure, but first, it pays to think about where you do this.
Currency hedging through your bank may seem like an obvious choice, but this can sometimes be surprisingly expensive, with unexpected fees and bad exchange rates. You may also find that your bank is unable to help you build a true currency strategy, which is why a payments specialist may be a better choice.
Choosing the right strategy
There are a number of different products to choose from, and a different combination of these will be right for different types of companies.
The three main types are forward contracts, spot payments and limit orders:
1. Forward contracts – Keep protected
Forward contracts are a great way of protecting your money from changes in the market. If you think today’s exchange rate is good, your payments specialist can lock it in on the day of buying the contract, but the transfer will be made at a later, more convenient date. That way, no matter what happens to the exchange rate in the meantime, you can be secure in how much money you or your recipient is going to get.
If you can start a forward contract when the currency is strong, you can stay protected from future dips. This is a particularly useful tool when constructing business plans and plotting expected revenues, as you have much more ability to predict what’s coming in.
2. Spot payments – On the day, easy and safe
The downside of forward contracts is that you can miss out on a great deal if the exchange rate strengthens after you’ve locked in your rate.
This is where spot transfers are useful. The clue is in the name – a spot transfer is made “on the spot”, which makes it ideal for fast overseas transfers that are needed on the day they are paid.
If you want to get a good deal, look for an international transfer provider – these companies use their own network of overseas bank accounts to make speedy exchanges, which saves the customer money on exchange rates as they are not being charged to move money to external accounts.
3. Limit orders – Waiting for the perfect moment
These contracts are ideal if you don’t need to send your money immediately. With a limit order, you make a contract through a payments specialist, setting an exchange rate at which you’d be happy to transfer – even if it’s not currently available. Once this ideal rate is agreed, your payments advisor will wait until the market moves to meet your limit, and will then make the transfer at the opportune moment.
A limit order is a great way to budget, but its downside is that it the timings are not predictable.
Finding the best mix
Sometimes it’s best to not pick just one option. For IT resellers, using a mixture of forward contracts, spot payments and limit orders can lead to the best result. By using a mixture, you will have a true currency strategy in place – a way to play currency fluctuation in your favour, without leaving yourself overly exposed to a currency crash.
It’s worth exploring a variety of options when creating your currency strategy as an IT reseller, there are a lot of options. Simply using your bank to make transfers may not be the optimal system for you and you could be saving a lot of money but transferring elsewhere.