Topics to consider before taking your business global
Doing business internationally can open up exciting new opportunities — it can help you expand into new untapped markets, increase the awareness of your products and services, and rejuvenate your business. But, it also comes with risks and challenges. Here are some key points to consider.
Quantify your foreign exchange risk
"Controlling your costs, protecting your profits, and being aware of fluctuating foreign currency (FX) rates are critical to the success of any international business venture," says Amy Henry, Managing Director, Foreign Exchange Services at Wells Fargo Bank. "Small business owners unfamiliar with doing business abroad should start by understanding how transacting in foreign currency can sometimes be more advantageous than conducting business strictly in U.S. Dollars. In addition, they should know what potential solutions are available to help manage the risks of fluctuating FX rates. For example, two currency management strategies that may be effective for a small business are forward contracts and multicurrency accounts."
A forward contract locks in an exchange rate for a future transaction. Negotiating in a local currency may help a business obtain optimum pricing and maximize profit margins. However, FX rates can be volatile; if there are strong adverse moves in a foreign currency, the fluctuation could have a negative impact on profitability. A forward contract locks in a rate of exchange for a future date, protecting margins by preserving your cost basis.
A multicurrency account allows you to hold foreign currency. When a business has both payables and receivables denominated in the same foreign currency, a multicurrency account can be an effective solution. A multicurrency account allows funds to be deposited and held in that foreign currency without conversion to U.S. dollars. These foreign currency-denominated funds can then be used to initiate foreign payables online, by check or wire. Multicurrency accounts can essentially take the rate fluctuation risk out of the equation and make foreign purchases and sales easier and more flexible. It is also easy to convert these foreign funds into U.S. dollars online when necessary or when the market rates are favorable.
Be prepared for additional documentary requirements on international products
Articles about "Know Your Customer" and anti-money laundering regulations dominated financial news in recent years. Several financial institutions have been heavily fined by regulators for failing to comply with requirements, in a regulatory environment characterized by strict enforcement. When you expand your business globally, understand that your FX provider will likely have to request additional corporate documentation before opening international products in order to satisfy these regulations.
"Complying with the additional compliance requirements for international products like multicurrency accounts can seem daunting — especially for a small business," notes Henry. "For this reason, it is important to work with an FX provider that understands both the regulatory environment as well as the nuances of small businesses. A financial institution should have a clearly articulated process in place for helping onboard small business customers in a compliant and efficient manner."
Work with an FX provider that understands small business
While many banks offer the ability to send and receive foreign currency payments, few have FX Specialists dedicated to the specific needs of small business clients.
Henry explains, "There’s much more to foreign exchange than processing transactions and exchange rates. Small business owners need an FX Specialist who can bring the right experience, help educate them and work with them to navigate the complexities of creating an FX strategy."
She added, "Choosing the right solutions for their business needs and size is critical. Many financial institutions are focused on large corporate clients who have 'global departments' and are not able to offer the personalized service that small business owners need to create an effective international business plan. Finding the right bank to work with is essential for any small business entering the international marketplace."
Whether you want to import from Italy, export to the Canada, outsource to Mexico, or establish a presence in the United Kingdom, it is important to construct an effective FX strategy. In doing so, you will want to find an FX provider that has experience in helping small businesses in the global marketplace. It is important to remember, however, that due to documentary requirements, it may take some time to set up international products. Covering these bases will help you succeed as you venture abroad.
Forward Contracts and MCAs: Key Benefits
|Forward Contract||Multicurrency Account (MCA)|
Key benefits and considerations:
Key benefits and considerations:
Find out how Wells Fargo can help your business transact globally. Call 877-593-2468.
Deposits held in non-U.S. branches are not FDIC insured.
Wells Fargo offers foreign exchange hedging products and foreign currency risk management solutions through Wells Fargo Bank, N.A., which is a swap dealer registered with the Commodity Futures Trading Commission and a member of the National Futures Association. This information is not, and shall not be treated, relied upon or considered as, investment advice or a recommendation or opinion to enter into any foreign exchange transaction or hedging strategy.