Every small and medium enterprise business owner knows that two things are important to run a successful organization- boosting revenues and mitigating risks!
Both these strategies or goals are essential when you are looking to grow your business and ensure freedom from financial problems. With smaller businesses often feeling that they do not have any control whatsoever over currency fluctuations and exchange rates, they are unable to plan and project effectively.
No matter what kind of a business you are, or the niche you operate in, doing business internationally can help you in multiple ways-
- It can improve your earnings and revenues through foreign exchange payments.
- Enable you to tap into newer markets where your products/services might be in demand.
- Reach out to a new target audience through online platforms like Ecommerce websites.
- Find an alternative to your locally saturated markets where growth is not there.
All this invariably means engaging with foreign currencies, exchange rates, and platforms. As a small business, you might feel overwhelmed when you have to deal with new financial terms.
In this article, we are going to look at the basics of forex trading for small and medium enterprises. Specifically, we are going to look at why SMEs and MSMEs should engage with FX trading, hedging, and costs savings. Additionally, we are also going to bust some myths around Forex Management and how it has always been something larger firms could afford.
Forex Trading and Management for SMEs and MSMEs
Any SME or MSME that sends or receives money in foreign currency can benefit from FX Trading and Management. If you are importing raw materials from abroad, or are selling finished products/services internationally, you are using foreign exchange.
This means that as a business entity, you are-
- Worried about the volatile nature and fluctuations in currency markets, including sharp drops because of natural emergencies like the Pandemic.
- Unsure about the various exchange fees, hidden charges, and commissions that are taken by banks and other fintech companies.
- Uncertain about the levels of safety and security when attaching your current account details or sending money to new business partners.
SMEs and MSMEs can benefit from Forex Trading in two major ways-
- Forex Hedging-
In very simple words, hedging is a practice to protect one’s financial interests in a currency pairing resulting from any adverse happenings. A business can assume both a short as well as a long position on the same currencies or pairs. Or, they can go for a short hedge. According to experts, securing both positions is referred to as a ‘Perfect Hedge’ as there are zero risks.
- Second Income Source-
SMEs and MSMEs do not have large financial resources as compared to their bigger counterparts. Events like the COVID-19 Pandemic can severely cripple their sales and operations. In such an instance forex trading can help open up a beneficial second stream of revenue for business owners. Betting on and against currencies can help generate income.
Is Forex Trading and Management only for Larger and Bigger Corporations?
For the longest time, it was only the big businesses that could benefit from effective corporation fx management. This is because banks and other traditional financial institutions offered forex management services to companies that operated a sizable financial sum and figure.
In other words, to be eligible for forex management services, you needed to commit to a financial sum that was far beyond what SMEs and MSMEs did regularly. This meant that every time a smaller business would approach the bank for forex management, they would get turned down or asked to increase their figures to qualify for the service.
However, in the last few years, technology and enterprising fintech start-ups have revolutionized the financial ecosystem. These new-age fintech companies realized that smaller businesses too required forex management services. Fintech companies like Wise and OFX have started offering forex management through their multi-currency accounts.
Multi-currency accounts have proved to be beneficial for smaller businesses because of the following reasons-
- They are easy to set up, do not require a ton of paperwork or verification details those small businesses need to fulfill.
- With everything online, making or receiving foreign exchange payments just requires an internet connection and a computer or a smartphone.
- The system operates 24×7 and most of the credible platforms like Wise and OFX have helplines and customer support numbers to help businesses.
- New fintech platforms offer lower commission fees and have no hidden charges. This adds to the savings of the smaller businesses and builds profitability.
List of 5 Important Things SMEs and MSMEs need to keep in mind in Forex Trading
In this section, we are going to look at five things that small businesses need to understand and remember when engaging with FX trading and management-
- Firstly, it is important to understand that the foreign exchange rates are never stagnant. In other words, they are always fluctuating. You can opt for a Futures Contract to reduce or mitigate the risks from FX trading, management, and international money transfers.
- Secondly, the exchange rates volatility takes place because of political, natural, and economic factors. The recent COVID-19 Pandemic saw exchange rates fluctuate drastically in practically all currencies of the world.
- Thirdly, a Multi-Account Currency enables a small business to hold and deal with practically all the major currencies of the world. With this set-up, small businesses are paying and getting paid in their local currencies effectively.
- Fourthly, new advancements in technology have made it possible to operate cross-border payments with safety and security. You can send and receive payments within a matter of a few minutes or hours depending on how good your service provider is.
- Lastly, using banks for forex or international money transfers is not the best option. This is because banks levy high rates or fees, commissions, and packages in a host of other hidden charges. This simply adds to the financial burden of a small business.
The Bottom Line
The aftermath of the pandemic has created a new world that is filled with infinite opportunities as well as great risks. By effectively engaging with forex trading and management, small and medium businesses can mitigate the risks and open up a new second revenue source. If you want us to help you with any specific point that has been mentioned in the article, please feel free to reach out to us in the comments section below.