Currency markets are notoriously volatile. An IT company's bottom line can be seriously affected by unexpected market movements. For the unlucky, entire profit margins can be wiped out by sudden rate changes.
Here, Alex Edwards, head of the corporate desk at UKForex (now OFX), shares his expert advice on how IT businesses can manage their currency risk and protect their business.
How to manage currency risk: Watch out for hidden fees
Whatever section of the IT industry you work in, it's essential to shop around for the best deal when planning any international transfers. Before making any payments abroad, check for any hidden transfer fees – some banks will slap on a charge upwards of £20, while others might offer a great first deal, but then ramp up the fees once you've made your first transfer. (See also: 8 best free and open source inventory management systems.)
How to manage currency risk: Seek an expert opinion
Banks aren't usually the best place to make international transfers – though sticking with your bank takes less effort, it can often cost you a good exchange rate, and leave you without a comprehensive currency strategy.
For a better deal, head to a specialist, who can give you comprehensive information on all the currency products available to help you choose the ones best suited to your needs.
How to manage currency risk: Make foreign pay cheques go further
If you're relying on payments from foreign employers or suppliers, it's important to make sure you're getting the best exchange rate on each of your transfers. In addition to double-checking for hidden fees, it also pays to compare the exchange rates you're offered.
A bank will typically quote you rates between 3-5% above the interbank exchange rate, which means it's worth getting a few quotes from established, FCA-regulated foreign exchange companies before committing to a deal. Just be careful, as some companies may entice you in with super competitive rates, but push out your pricing margins once you've completed a few transactions.
How to manage currency risk: Handling the North American system
IT businesses often find themselves dealing with the US, so it's worth noting that the American banking system can sometimes cause a headache, particularly if you need money sent promptly.
The US has a more complicated national banking system than the UK, and Canada is only marginally more advanced, which means that if you transfer directly from bank to bank, payments between the UK and North America can take days to clear, as well as incurring significant fees.
International payments providers offer a real advantage in this case, as they can work around these problems to provide speedy transfers, without ramping up costs for the customer. (See also: 9 best web analytics tools; alternatives to Google Analytics.)
How to manage currency risk: How to transfer money overseas
There are a number of ways to transfer money overseas, each method offering its own benefit. A specialist payments provider will be able to take you through each of the pros and cons – and even help you combine options to mitigate currency risk.
Here's a quick rundown of the methods available:
1. Transfer quickly with one-off payments
Changes in the currency markets mean that when the exchange rates work in your favour, you need to move fast to take advantage of them.
In this situations, one-off or single payments are ideal. Made “on the spot”, this sort of payment is perfect for urgent transfers abroad, or for payments with a slimmer profit margin, that would benefit from acting swiftly on an advantageous rate.
2. Protect against future shocks with forward contracts
Forward contracts are a great way to insulate your money from a dip in your home currency, and are a great tool for resellers or anyone involved in the regular import or export of goods. If you think today's exchange rate is good, a money transfer specialist can secure it for a transfer made in the future. So, whatever happens to the rate in the meantime, you can make informed decisions with confidence in the exchange rate you've locked in.
3. Wait for the right rate with limit orders
Limit orders are another useful tool, and are particularly good if you aren't looking to send your money right away. This strategy involves drawing up a contract with a specialist trader, which specifies the exchange rate at which you'd like to transfer – even if it isn't the current rate. Your specialist will watch the market until it reaches the rate or ‘limit' you've set, and will then complete the transfer on your behalf. (See also: Best smartphone for business 2016.)
Alex Edwards is head of the corporate desk at UKForex, an international money transfer company.