If your business is considering going global, then it’s likely that you’ll have to dabble in the international currency market from time to time. After all, you’ll have to manage imports and exports, manage overseas real estate and maybe even pay foreign workers.
Here we’ll look at some of the intricacies of foreign exchange for small businesses. This will include what it is, how it works, and how your business can save money when using foreign exchange services.
What is Foreign Exchange?
Foreign currency exchange (also known as forex or FX) is the process of exchanging one currency for another for a designated exchange rate. The process is very similar to when you buy currency for a holiday abroad, except it’s done digitally rather than at a travel agent.
What you’re exchanging from and to is known as a currency pair. The currency you currently have is the base currency, while the one you’re looking to acquire is the quote currency. Each currency has a 3 letter code. The pound is GBP while the euro is EUR and the American dollar is the USD.
So if you’re trading GBP/USD, you currently own GBP and are looking to exchange it for USD. If the rate you’re offered is 1.35, it means you’ll receive 1.35 dollars for the pound you currently own.
What Else Do I need to Know About Rates?
The most important thing you need to know is that these exchange rates fluctuate rapidly. Often, the forex market is the most volatile in the world, and over $5 billion is traded there every day.
This means that if your business is continually transferring money overseas while the base currency is weak, you’ll be getting less for your money. However, if you’re aware of the fluctuations, you may be able to wait until the rate is strong, which would mean you’re much better off.
By keeping a continual track of exchange rates, the market trends and the factors that make them move, you’ll be able to move your business’s money at a more lucrative time.
By doing research about forex and how exchange rates can affect your transfers, you can put your business in a better financial position. By learning to play the game and keep your currency in the host currency until a better exchange rate occurs, you could potentially save thousands.
So next time you’re transferring money abroad as part of a business deal, think on about exchange rates.