Exchange Money Risks For Businesses Trading Internationally – part 1

November 27th, 2012

For businesses trading internationally, exchange money can pose many risk factors as a result of trading in a foreign currency, which may not be experienced when trading domestically. A business will generally generate revenue capital by borrowing or utilising their own equity to invest in assets, with the aim of generating a return on this investment. Often companies venture outside of their comfort zone and invest in products, services, property and assets abroad. There are often excellent international opportunities, particularly in emerging markets, when businesses exchange money and make overseas investments where they can see a quick and often more substantial return than they might enjoy in their native land. There are however increased risks with investing internationally.
In these types of business transactions, there are many reasons the transaction can pose a fiscal threat. For instance, risk can arise when a company has a committed cash flow to be received or paid out in a foreign currency. If the business sells its services or products linked to pre agreed credit terms, which might typically be anything from 30 – 120 days, it obviously experiences a delay in receiving payment (often quite a substantial delay). During this period of delay, the value of the foreign payment, once it is exchanged, could result in a loss for the company, if the exchange rate has shifted during the period of time the credit was granted. This is just one example of how a business can run the risk of generating less revenue than it forecast, or worse still make a loss. In part 2 of this article, Best Exchange Rates UK look at other risk factors surrounding international business exchanges.
Risks aren’t just restricted to foreign business transactions. Domestic business to business trading can still pose exchange money related risks, perhaps because the raw materials they use may be priced in a foreign currency or be sourced overseas and these prices fluctuate as a result of shifting foreign currency exchange rates. This could have a significant impact on the production cost of a product and therefore the margin made on sales, particularly if preferential rates have been pre-agreed or lengthy credit terms have been granted.