If you want to grow your business by selling goods or services overseas, you’ll need to set up infrastructure to receive cross-border payments in different currencies. But while this offers the chance to grow your business exponentially, it also presents a host of challenges.
Here, we’ll explore how to set up a system to receive international payments – and how to create a strategy for managing foreign exchange that works for your business.
For more tips on how small businesses can better manage international payments, listen to the cross-border payments episode of our Business Class: Money Minutes podcast.
Open denominated bank accounts
The first step is to identify which currencies your business will receive payments in. Software company QBS sells to customers in more than 100 countries, however they do all of their business in GBP, USD and Euros. “Based on our experience, businesses in Asia and Latin America are more used to dealing in US dollars,” says founder Dave Stevinson.
When you know what currencies you will be invoicing customers in, set up accounts with your bank in those currencies.
Managing your FX exposure
A key challenge for businesses is managing their exposure to volatility in exchange rates. If you invoice a Europe-based customer for a fee agreed in Euros, and they pay 30 days later according to the terms of your contract, there’s a chance the Euro could strengthen against the pound in that time, eating into your margin. The longer the gap between agreeing a fee and receiving the money, the greater the risk that the rate could move against you.
“Different types of business have different pressures, but the key things are the volume of transactions and the cash cycle length; the longer the money is out the greater the risk becomes,” says Stevinson.
Some strategies to mitigate that risk include:
- Offering shorter terms and encouraging customers to pay early.
- Using forward contracts to fix the exchange rate for a future transaction, offering you clarity on how much a deal is worth.
- Use cash received in, for example, Euros to pay any business costs the company might have in that currency - known as natural hedging.
Then there’s the time it takes for payments to come through – which can be several days, depending on your bank and where the money is coming from.
“The UK is part of something called the Single Euro Payments Area (SEPA), which is a pan-European system that allows you to send Euros in efficient means,” explains David Song, a policy expert at UK Finance.
“That’s usually a next-day payment. One of the systems that’s emerging there is an instant payment system, so you’ll get your money in seconds. And that’s a cheap and very efficient way for small businesses to trade in Euros.”
The UK is still part of that system after leaving the European Union.
What to look for in a currency provider
An important part of ensuring the smooth management of foreign exchange is finding good currency providers, typically banks or other financial institutions, to work with.
“We look at two things: cost performance and execution performance,” says Stevinson.
Stevinson recommends the following when selecting a currency provider:
- Make sure that the provider is a strong, reputable company with an impressive balance sheet.
- Look for good customer service in case things go wrong. Mistakes happen and you need to be able to pick up the phone and deal with somebody when they do.
- Ensure the provider offers complete transparency of rates along with real-time visibility, so you know exactly what rate you are committing to.
- Whether the provider offers an API that you can incorporate into your business’s systems, and offer straight-through processing. “What you don’t want to do is have to employ somebody who has to pick up the phone to your broker every time you want to exchange money,” says Stevinson. “You want to put that into a computer and it goes through automatically.”
- Does your provider offer a good credit limit that works for your business? You’re making transactions all the time, in real time, through a computer; you need your provider to provide you with credit, rather than having to wire the funds every single time.
American Express’ Foreign Exchange International Payments Platform allows you to receive and send more than 80 currencies. There is no fee on incoming currency payments, no limits on transfer value, and the platform allows you to set up forward contracts should you wish to mitigate your risk against forex volatility.
We also offer competitive currency exchange rates, on top of providing currency trading that is quick, clear and inexpensive. Find out more about how American Express can support you when dealing with business abroad.
Listen to the Business Class: Money Minutes podcast here.