If your small business handles any transactions overseas, chances are good you’ll have to deal with currency exchange rates. Depending on your type of business and what the current exchange rate is, this can either lead to losses or gains. However, when you’re transferring money from one country to another, there are ways to minimize your risks.
If your company is U.S.-based and you sell your goods in other countries, you usually ask for payment in U.S. dollars. In this case, the foreign buyers are the ones to change their currency into U.S. dollars to make their payments. With these export prices, the foreign buyers have the advantage if their currency is strong compared to the dollar, and they have the disadvantage if their currency is weak.
On the other hand, if your company brings in materials, goods, or services from a foreign market, you need to convert your U.S. dollars to the foreign currency you’re dealing with to make your payment. These are import prices, and when the dollar is strong, you have the advantage, but when the dollar is weak, you’ll lose money.
Price competition can occur in two ways for small businesses. First, it can affect a U.S. company in its home market if a competitor in a foreign market realizes a decrease in the exchange rate for its own currency. If this happens, the foreign competitor can lower its prices in the U.S. market to make up for the different exchange rates.
Additionally, if you’re pricing products to sell to international clients, it’s important to know what the exchange rate is so you know where you stand in the market. You don’t want to put yourself at odds with your competition in that country, yet you want to make sure you don’t lose money as well. By keeping an eye on the market, you can typically stay competitive in either scenario.
If your U.S.-based company does a significant amount of business in Europe and makes its revenue in euros, yet your employees are in the U.S. and you pay them in U.S. dollars, you have the potential for higher earnings. However, if the opposite is the case, and you have to pay most of your employees in euros, you could take a hit on higher costs.
If you have to send money to a foreign country with any regularity, it’s better to avoid banks because they typically charge more fees than online brokers. For example, if you have to send money to Mexico, you can use a money transfer for a convenient and simple payment option. Money transfers let you use a credit card, debit card, or bank account to send money. Additionally, you can immediately check the exchange rate so you know exactly how much you need to send.
Even if you own a small business, it’s still possible to conduct transactions in foreign markets. While dealing with currency exchange rates can have a significant impact on how your company does business, paying attention to these risks can help reduce them.
Featured image: Flickr / Japanexperterna.se