It is often said that for a business, profit may be its food and drink, but cashflow is its oxygen. An interruption in incoming funds can prove fatal and securing credit can be costly. So how can SMEs make the most of the opportunities they have to keep everything flowing smoothly, especially if they also need to think about funding foreign currency transactions?

For any business, the biggest risk is lack of cashflow. Many businesses that fail are actually profitable, and it is just the lack of available funds that has stopped them from thriving. Cashflow is also necessary for growth, so successful businesses often need to draw on credit too. It is an essential part of business strategy.

Credit can be secured on assets, or unsecured. It is always finite – there will be a limit to how much you can borrow from a lender, and a deadline when it needs to be repaid. There are many companies who provide trade finance or credit solutions and the important thing is to make sure the cash keeps flowing. 

Cashflow and foreign currency transactions

Businesses with overseas suppliers or customers are likely to be dealing in currencies other than sterling. With currency rates fluctuating continuously, this can prove a considerable challenge. Over the last year, rates have been volatile, with some rates fluctuating up to five percent in a month. So, for example, a regular payment for the same value of euros, can cost wildly varying amounts in sterling from one month to the next. SMEs facing this kind of uncertainty often find that they need a hedging strategy, so they know exactly what their incomings and outgoings will be in sterling. 

A hedging strategy is likely to include products such as forward contracts, market orders or vanilla options. These often require deposits to be paid, and if a business is holding a number of forward positions at any one time, it could have a large amount of cashflow tied up.

Specialist providers

If this is the case, it can pay to keep currency transactions separate from the main banking relationship. A business may have a line of credit with their bank, and if they also want to start hedging their currency requirements, this may need to be funded from the same line of credit. So, to ensure that their credit facility is always available, many SMEs choose to take their international payments and receipts to a specialist provider who will work with them to establish a hedging strategy that meets their needs. 

There are many advantages to working with a specialist currency broker. Any credit line that is taken out with them will just be to fund currency transactions, so it will be completely separate from credit at the bank. It will also be unsecured, whereas banks will usually want charges and debentures on a company’s assets. So, it is an extra credit facility that complements the loans and overdrafts offered by the bank. Meaning that cashflow is protected. 

A currency provider will want to get to know your business thoroughly before offering a hedging strategy. This will help them assess what kind of products will work well for you. And because they know you well, they can offer a quicker turnaround on credit decisions than most banks can, depending on the urgency of the situation. 

Western Union Business Solutions – putting SMEs in control over their international transactions

Western Union can offer customers access to over 130 currencies in 200 countries and territories, competitive spot rates, optimal routing and select free transfers, as well as a globally leading online platform which not only can help to facilitate online payments and bulk uploads but can also give real time access to positions and mark to market valuations.

With a qualified team of currency experts and a service tailored to the needs of SMEs, they specialise in helping international businesses to mitigate risk from currency fluctuations, with a range of hedging tools and strategies. With their wide range of Foreign Exchange services, helpful analysis and decision support tools, they give SMEs more transparency and control over their foreign exchange and international payments. 

With any hedging tool, there are associated risks. Your foreign exchange provider should explain what these are, so your decision-making is informed, and you are confident and comfortable with the choices you make. It may be that your business is not suitable for hedging products offered by Western Union Business Solutions. However, please call 0800 096 1229 or fill out our form at https://business.westernunion.com/en-gb/contact for a free, no obligation discussion to learn more.

© 2019 Western Union Holdings Inc. All rights reserved.

The information contained within this article does not constitute financial advice or a financial recommendation, is general in nature and has been prepared without taking into account your objectives, financial situation or needs. 

This information has been prepared solely for informational purposes and does not in any way create any binding obligations on either party. Relations between you and WUIB shall be governed by the applicable terms and conditions. No representations, warranties or conditions of any kind, express or implied, are made here.

Western Union Business Solutions is a business unit of The Western Union Company. Services in the UK are provided by Western Union International Bank GmbH, UK Branch and Custom House Financial (UK) Limited (which does business under the trade name of Western Union Business Solutions).