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  • August 12, 2016

The Currency Exchange Risks of Doing Global Business for Small Businesses

When you frequently make international payments to different countries there are naturally FX (Foreign Exchange) risks involved, and if kept unchecked the costs will eventually negatively affect your company’s bottom line over time.

Wouldn’t things be easier if we could just pay everyone in our own money as opposed to the vendor’s currency?

Sure, if your vendor actually has a secondary bank account based in your currency, but the fact is that not all businesses have multiple currency bank accounts. 

Although if your supplier is okay with accepting your base currency, things will be fine and dandy at first,  but at one point or another, the market value of your currency will depreciate against theirs.

As a result, your vendor may tack on some extra charges to your next invoice due to the losses they took with the FX rates from converting your payment into their local money, so you might end up paying much more the next time.

To avoid that and still continue to pay in your own home currency, arrange for a mutually-agreed upon fixed FX rate between your company and theirs either in a contract or writing somewhere after both parties have reached an agreement about pricing.

That way there are no surprises for payments and you will be taking control of how much you will pay rather than leaving it up to the markets to decide, but the disadvantages are:

  • the possibility of periodic renegotiations of fixing FX rates with your vendor(s),
  • and not fully taking advantage of the market-set FX rates set in your favor.

The other alternative is to just to simply pay in the vendor’s local currency.

If your company does or plans to do a lot of business with that particular vendor, just simply open another bank account based in your supplier’s local currency.

I personally prefer this option better as I have more direct control of my finances, and I also find having my supplier’s currency on hand makes the accounting less of a hassle to deal with.

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