Managing international transfers and foreign exchange never used to be a part of life as a small business in Cheshire. It wasn’t long ago that accepting card instead of cash, let alone contactless, became a symbol of modern business apparatus.
Foreign exchange (FX), which is the handling and exchange of different currencies, has become a big part of the economy. Not only for the large global corporations, but for smaller businesses too.
Being a hub for logistics, agriculture, and chemical manufacturing, Cheshire’s industry diversity along with its geographical location makes it a highly internationalised economy. While FX has become part and parcel of life for many businesses, very few take it strategically seriously.
Necessity of managing FX risk
The foreign exchange market is notoriously volatile. Its 24-hour activity that cannot be underpinned by financial statements and profit/loss make it a playground for technical traders.
On any given week, you may find the GBP moves by a percentage or two against the Euro, while in big events, it can swing by much more.
The impact on local businesses cannot be overstated.
Imagine a chemical manufacturer who contracts to sell products to Ireland, who denominate their business in Euros. If the Euro goes from 1.18 to 1.12 against the pound, this could be €6,000 difference in a €100,000 Euro transaction. If your local bank claimed it was charging a €6,000 fee for a transfer, you would be horrified. But, this is normal life for an exporting Cheshire business.
What’s more of a risk is when importing supplies. A local firm can always fix a GBP price for sales – and therefore the cost is imposed on the buyer (who may not shop elsewhere). With imports, a locked-in deal for X amount of supplies can mean the true price is fluctuating by the minute – not ideal for cash flow forecasting.
For example, a lot of electrical machinery in the UK is purchased from Turkey. Today, a contract for 100,000 Lira worth of supplies would cost £3,000. One year ago, when the exchange rate was 0.050, this would have cost £5,000. This 40% reduction dramatically impacts the profitability of the local business, but what if the fluctuation was the other way around?
While the pound rarely sees a 40% fall, it did drop ~23% from September 2021 to September 2022 against the dollar. When handling such large imports, contracts aren’t always easy to get out of and to switch suppliers.
There are additional examples and use-cases available on MoneyTransferComparison, one of few guides attempting to make FX accessible for smaller businesses.
The cost of international payments
Volatility and currency risk is one issue that local businesses must contend with, but it’s also the cost of making international payments. For example, around 2-3% is commonly lost during an exchange irrespective of fluctuations – this is the spread (similar to commission) that banks will charge.
So, paying an overseas supplier £50,000 via a bank transfer may incur £1,000 to £2,000 in what is essentially a poor exchange rate, along with some small fixed wire fees (i.e. £30). These are costs that can at least be factored into forecasts for businesses, but it still eats away at the bottom line.
Cheshire’s economic landscape
Cheshire has a unique economy. It’s extremely diverse in its industry, and it’s not often that an industrious region is so heavily visited by tourists, either. With a strong history of manufacturing, it was not one of the many failing cities in the 1970s when manufacturing fled UK cities.
It managed to escape this fate for a few reasons – it was economically diverse, innovative in its manufacturing (not low-cost), had good proximity to major cities, and solid infrastructure.
To this day, there is a vibrant agritech and clean energy community that exists, along with some large multinationals, such as Essar Oil UK and Bentley Motors. Financial services are also prevalent, with the likes of credit card provider MBNA and various asset management firms. It’s highly diverse, and with the likes of Airbus operating locally too, it highlights the internationalized economy of Cheshire.
Many of these businesses are heavily dependent on imports and exports, something that was made more difficult after Brexit. Cheshire Cheese Company was one victim of a loss of EU funding, and subsequently was forced to be sold to a large company in order to regain access to EU customers. However, the turbulence that Brexit caused on the pound was also at play.
Generally, people do not think of FX in terms of systemic risk. Rather, it’s thought of as a term to explain bank runs, where one failure has a knock on of another. But system risk relates to a risk that exists for all entities in a market, and for Cheshire, that is FX. A sharp depreciation in the pound can increase the supplier costs by many percentiles across all companies.
How business money transfer specialists can help
One way for an individual business to help smooth over their FX concerns is with a business money transfer company. Foreign exchange management is difficult, and given that most international companies in Cheshire are not finance companies, it’s common to lack expertise in this area.
Before looking at any tailored services, it’s important to note the sheer cost of FX on a business irrespective of fluctuating rates. Many thousands of pounds each year can be lost for a single business alone due to a poor exchange rate and fixed fee. So, business fx specialists combat this by offering something closer to a 0.5% to 1% spread (over half that of banks) and no fees. Immediately, international transfers are cheaper.
There are websites out there ranking money transfers from best to worst, and they tend to use more variables than just cost. In fact, there’s a lot that these specialists compete over.
Tailored solutions
Handling international payments can be tricky beyond the cost of the transaction. Fx management is about mitigating foreign exchange risk, which calls for products like forward contracts. These hedging products are often advised by the dedicated account managers as a way to lock in an exchange rate for the future, thus helping firms not just avoid volatility risk, but makes it easier to forecast costs and sales figures.
Business foreign exchange specialists can also provide auditing and treasury solutions, as well as real-time market insights and managing bulk orders to reduce costs. Ultimately, there are genuine business solutions that surround fx management, and it’s something that Cheshire businesses often do not consider. However, the free nature of the account managers means that often solutions aren’t considered until they’re heard.
