Protecting Your Small Business from Foreign Exchange Exposure

Foreign exchange is a matter that very many small businesses do not consider at all, especially since such businesses only operate with one currency type from production to selling of finished products. It’s important for every business to have an eye on the foreign exchange market and determine how that may affect their business.

This is a simple way that can help you to optimize business operations, and stay ahead of your other competitors even if you are not in the same country. This is especially important in the Internet Age where more and more small businesses are venturing into markets beyond their geographical regions. However, without appropriate information, you may discount foreign exchange since you have no cross-border transactions.

Even if you buy all your raw materials, manufacture products and sell to clients who are solely located in your country, you may still have currency exposure.

Case study

Consider your wider commercial landscape, which would include similar products that sell in your market, even if their source is a different geographical region. Likely, you will identify one or two foreign competitors who have gained significant market share with production costs that are easily comparable to yours.

Take this company that was located in the UK and only sold in the UK. Following comprehensive market research, they found that the biggest competitor was a Dutch company which had improved its marketing strategy and was commandeering more and more of the UK market.

Owing to the weakening of the Euro compared to the Sterling pound, their products hit the market at a price that was reduced by nearly 15%, which is why they were able to gain more ground in the UK market, exposing the local business to foreign exchange exposure.

How to protect yourself

There are a few things local businesses can do to protect themselves from Forex exposure. First, you may consider sourcing your raw materials from the zones where your competition is getting them, since they are likely to be cheaper even if you consider shipping costs. As your local currency grows stronger, you’ll technically be paying more than your competitors for production, and you will be forced to have higher prices or lower profit margins to compete favorably.

Another method is to provide lock-in purchase rates, which means you buy and sell currencies at a fixed amount regardless of the market value at the time. In this way, should foreign exchange rates shift in an unfavorable direction, you may still see the same profits based on the pre-determined amount.

Typically, such agreements are negotiated with foreign suppliers at the beginning of the accounting period for a small cost. Therefore, your business would afford to reduce its selling prices without substantially affecting your profit margins.

Debt relief service providers are usually financial experts who can help you determine if your business is at risk of exposure due to different foreign exchange rates with your regional competition. To know more about debt relief programs, click here. However, the worst thing you can do is to completely ignore it, thinking that you are immune because you’re a local business, especially in this economic market where global trade is being made much easier.