Recommendations for using foreign currency in international operations
As many exporters discover in their daily lives, settling a transaction in a foreign currency can be complicated.
However, it is possible to protect your company from currency risks by settling transactions in a foreign currency.
Below are some tips for deciding whether it makes sense to settle a transaction in a foreign currency and determining how best to protect yourself from currency risks.
Evaluate customer importance
It is always easier to invoice in euros, but it may not be convenient for some clients. Offering the invoice in your foreign partner's currency, if that's what they prefer, can strengthen your relationship.
Costs
Generally speaking, if a foreign currency is rising against the Euro, you should benefit from billing in that currency.
If a foreign country's currency is falling against the Euro and your business is from the EU with an investment there, you are going to lose by doing the transaction that way.
However, the costs of opening a foreign exchange account and covering a transaction can be considerable, so you will need to weigh those factors when determining whether a deal will work for you financially.
Both banks and forex brokers offer Ecuador Mobile Number List foreign currency accounts , and shopping around to find an arrangement that reduces the cost of the transaction is often worth it.
To achieve cost efficiencies, it is best to develop a strategy with your advisors for settling offshore transactions, rather than dealing with transactions one by one.
If you operate in multiple countries, it may make sense to offer foreign currency settlements only in the major markets in which you operate.
When you organize contracts to set rates for a certain period of time, you must have individual contracts for each country.
For example, if you operate in both Singapore and the United Kingdom, you would need to have separate contracts for each.
watch your back
When you invoice in a foreign currency, the biggest risk is currency fluctuation and the risk of the currency going up or down against the Euro.
Additionally, the markets are extremely volatile right now.
Your bank or currency broker can advise you whether it makes sense to protect against potential currency fluctuation and what type of transaction is best.
Some transactions will protect you from a possible rise or fall in the currency you are using.
Generally, the contracts that exporters use to hedge are called forward contracts or currency forwards.
If you sign a 90-day forward to buy the euro, for example, you will lock into the euro at the current exchange rate.
Whatever coverage you use, it can't protect you from all potential risks, so make sure you have the cash reserves to insulate your business if something goes wrong.
Consider your exhibition
A rule of thumb when exporting manufactured goods is that the longer the period from initial contract and manufacturing to shipping and delivery, the greater the exposure to fluctuations between the two currencies.
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For example, if you are manufacturing a boat in Bilbao that is being sold to a shipping company in the United Arab Emirates, the time period between project start and payment would be quite long, creating a lot of exposure.
The longer the time, the less likely it is that the importer or exporter will be willing to absorb that risk.
However, if you are submitting a perfume order that you know the customer always pays for within 30 days, the solution may be simpler.
Both parties may be willing to agree in advance to an exchange rate that will be applied when delivery occurs.
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