With your buyer’s hat on it may not be too difficult to persuade an overseas supplier to sell to you in Sterling (or GBP which stands for Great British Pounds as the foreign exchange dealers refer to the Pound) rather than your supplier’s own currency – but with your seller’s hat on – a potential overseas customer may twist your arm to sell to him in his currency.
Unfortunately agreeing to sell to an overseas customer in a currency other than Sterling could lead to you losing money if the exchange rate at which you have priced your goods moves against you before your customer pays you.
You do however have a few simple options to help you to reduce your risk.
Agree an equal and opposite deal in the same currency
Your French customer wants you to price your £10,000 order in Euros – today’s exchange rate is 1.25 Euros / £1.00 – so he wants you to charge him 12,500 Euros.
Go through your supplier list to see whether you currently import anything from a country in the Euro zone – you may well do – but your German supplier may currently be invoicing you in Sterling – if you do have such a supplier – ask him if he will agree for you to pay the next £10,000 of his invoices in Euros – so 12,500 Euros. If you agree this sort of arrangement at the same exchange rate as for your sale – any movement in exchange rate will not lead you to losing money – it’s a bit like a bookie “laying off” a bet!
You will tend to have more success with the above arrangement if your supplier is a larger company and is therefore already set up to deal in several currencies.
Create a currency overdraft
You have a £100,000 overdraft facility of which you always use at least a half,
- Open (in the above example) a Euro bank account.
- Sell 12,500 Euros (this will lead to the creation of a 12,500 Euro overdraft) and pay off £10,000 of your Sterling overdraft – you have now guaranteed your desired exchange rate.
- When your customer pays you his 12,500 Euros – use this to pay off your Euro overdraft.
As things stand – you would also save yourself a bit of interest with the above arrangement – as Euro and US Dollar interest rates are a bit cheaper than those in the UK.
Take out a forward contract
This involves entering into an agreement with your bank – again using the first example – your bank buys Euros from you between now and say 3 month’s time at today’s rate.
Buying and selling in several currencies?
This is a simple but cost effective tip if for example you are selling in Euros and buying in US Dollars.
- Open a bank account for each currency in which you have dealings – as this is usually cheaper than asking your bank to convert a foreign currency receipt straight into Sterling.
- If you have received $16,500 of US Dollars (roughly £10,000) and need to buy 12,500 Euros (roughly £10,000) – don’t convert the US Dollars to Sterling and then buy the Euros you need – as doing this will enable your bank to take 2 bites out of your money – instead buy the Euros you need with the US Dollars – enabling your bank only to take one bite out of your money!