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Both individuals and businesses cannot avoid foreign exchange (FX) rate risk because of how interconnected our world has become. Whether you’re travelling, shopping online, or dealing with overseas vendors, you need to exchange your local currency for the desired foreign currency to transact. How you exchange your currencies may result in varying costs for you.
Similarly, businesses that engage in frequent cross-border payments may encounter varying FX rates whenever you receive or make payments in foreign currencies. FX risks and costs typically increase with the number of currencies that a business needs to deal with.
Unlike multinational corporations, small businesses may not have the volume and pricing power nor the local operations to access foreign currencies and gain favourable rates. As a result, you may need to adopt different strategies to get the best FX rate to lower your business risk and costs.
Read Also: Why Open A Business Account With A Bank?
How Exchange Rate Affects Businesses
An exchange rate is the value at which your base currency (i.e. Singapore dollars) is priced against the foreign currency you need.
For example, if the exchange rate for the USDSGD is 1.35, it means that US$1 = S$1.35. Assuming the Singapore dollar strengthens against the US dollar and the exchange rate falls to 1.30, it would reflect that you now need less Singapore dollars to exchange into one US dollar.
A Singapore-business would find it cheaper to import goods or services from the United States if your home currency strengthens. On the other hand, if the Singapore-business exports its goods and services in US dollars, it would now receive less in Singapore dollars, which might affect its profit margins.
This is why changes in exchange rates can affect businesses in different ways. The volatility of foreign currencies affects how businesses may need to deal with their costs and revenue received and made in foreign currencies. With a more robust FX strategy, businesses could mitigate any fluctuations in FX rates and improve their bottom line.
How SMEs Can Get The Best FX Rates
Here are some methods that SMEs can consider using to reduce their FX risk and get better rates when exchanging for foreign currencies.
#1 Open A Multi-Currency Account To Hold Foreign Currencies
Businesses that must deal with one or more foreign currencies may find it challenging to reconcile their records, especially if such transactions are regular. By setting up a multi-currency business account, businesses would be able to conveniently receive and make payments in different currencies within one account.
It also reduces transaction costs, as you avoid unnecessary currency conversion fees and potential losses from exchanging at unfavourable rates. Instead, you can transact in the various foreign currencies as and when you need them.
One such account is the OCBC Multi-Currency Business Account (MCA). It enables account holders to transact in up to 13 major currencies, like USD, EUR, AUD, GBP, and HKD, without any initial deposit requirement or set-up fees. There are also no fall-below fees, and the $10 monthly account fee is waived if you also open an OCBC Business Growth Account for your SGD needs. With this, you can convert one currency to another without any fees.
#2 Lock-In Exchange Rates In Advance
In most instances, you may only exchange the required foreign currency when you need to make an immediate payment. This is referred to as a “spot transfer,” as the exchange rate is determined at the time of exchange, which can fluctuate by the second.
Another option you could take is to book an FX contract, which allows you to lock in the current exchange rate for a later currency transfer. This is useful if you want to have visibility over your FX risk, as you are able to determine the exchange rate to convert in advance of your need.
You can easily access these features on OCBC Velocity and the OCBC Business App, which offer real-time foreign exchange rates and the possibility to book an FX rate for use two working days later. You can hedge your business currency risk from a selection of 13 major currencies, 24 hours a day, from Monday to Friday.
This way, you can have greater certainty over future foreign currency payments and receivables without having to rely on the spot rates.
Read Also: 5 Things You Need To Know Before Importing & Exporting For Your Business In Singapore
#3 Set Alerts To Buy In At Favourable Rates
Another way you can get your preferred FX rates is by setting an alert. This allows you to be notified to buy or sell your preferred currency at a set target exchange rate.
To benefit from this strategy, you may want to book and store more foreign currency whenever you see favourable rates arising, so you do not have to constantly worry about not having enough for your upcoming payments.
Choose A Strategy That Fits Your Business Needs Best
Not all the strategies listed above may be suitable for your business. Rather, you could look for those that fit your business needs. Having a good FX strategy can not only save you time but also reduce your business expenses. To benefit, business owners with sufficient cash to buy foreign currencies when the rates are favourable can make use of the OCBC Multi-currency Account and the FX contract booking features for better control.
Another advantage of using a local bank, like OCBC, is that you can house all your transactional needs in one place. You do not have to go to different accounts or platforms for each business transaction that you have to make. For example, if you have to make an overseas transfer that is very urgent, or dealing with more obscure foreign currencies or very large transfers, you have access to OCBC’s Telegraphic Transfer (TT) solution. Thankfully, OCBC has also reduced its commission fee on outgoing telegraphic transfers to a flat fee of SGD
30, and the commission-in-lieu-of exchange and cable charge are also waived.
Moreover, you can also gain complementary access to digital banking features and tools within your OCBC business account. This will set you on your way to digitalising your business with e-invoicing, cash flow management and more.
Read Also: 3 Things (That You Probably Didn’t Expect) Your Finance Manager Can Do In OCBC Velocity
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