Halo Financial whitepaper 1 - SME

White Paper As increasing numbers of UK companies are seeking growth through overseas markets, can better management of currency risk help sustain that growth?

Did you know that 19% of SME’s either export or import and therefore are exposed to foreign exchange risks*.

Many businesses in the UK are seeking and prospering from opening up their services or products to new overseas markets.

But trading successfully internationally is not without its challenges.

One of the most important challenges for a business to overcome is how to best manage foreign exchange risk and within this whitepaper we provide a base on how to address this.

Currency risks are an intrinsic part of international business.

A direct alternative to the banks, Halo Financial provides currency risk management strategies and best exchange rates to improve companies' profit margins.

Halo can save you money. Money that can boost your company’s profits, not your bank’s!

About Halo Financial Halo Financial is one of the UK's most respected foreign exchange brokers, providing specialist foreign exchange trading facilities to a range of companies across the business spectrum. Authorised by the Financial Conduct Authority and by the HM Revenue and Customs we deliver an unparalleled combination of expertise, competitive exchange rates and efficient payment processing.

Value that we deliver personally through a high calibre team and can be measured on the bottom line.

Call us today on +44 (0)20 7350 5470 or visit our website for more information: www.halofinancial.com/sme * SMEs and foreign exchange risk: are small and medium-sized accountancy practices up to speed? By ACCA Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727.

Her Majesty's Revenue & Customs MSB registration No. 12197454. Registered in England No. 5155787. © 2014 Halo Financial Ltd.

Businesses are expanding overseas – but are they aware of the currency implications?

According to the Department for Business Innovation and Skills1, at the start of 2013, there were 4.56 million businesses in the UK that each employed less than 49 staff and their combined turnover was £1,600 billion.

However, in the last available set of data from the Office for National Statistics2, it was revealed that only 10% of this group of businesses import goods and only 9% export. What was very interesting in that ONS report was the increasing tendency for SMEs to move into import and export activity the longer they stay in business. And, in the 21st Century internet age, all business is becoming ever more global, so that trend is almost certain to accelerate.

10

%

EXPORT

9%

IMPORT

10% of SME’s export and 9% import

So, at a time when the UK economy is staging an undeniable – albeit delicate recovery and UK data is showing promise in all sectors, there is undoubted capacity for SMEs to strike out into overseas markets; either in search of new suppliers or in the quest for new customers.

After all, once you have proven your products at home and proven your resilience by surviving the harshest recession in over 70 years; you ought to be ready for anything.

Only 7.6% of companies are involved in import/ export activity during their first 2 years of trading but nearly twice as many will be doing so after 20 years in business.

Government departments are throwing great weight behind plans to get British business exporting and there are Government backed funding and lending schemes designed to make international trade plans less of a leap into the unknown and more of an eyes-wideopen advance. However, that openness isn’t always obvious when it comes to one crucial area of planning; that of the foreign exchange management.

According to ACCA3 many small practitioners should be doing more to manage their foreign exchange exposure.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254552/13-92-business-population-estimates-2013-stats-release-4.pdf http://www.ons.gov.uk/ons/rel/abs/annual-business-survey/characteristics-of-exporters-and-importers--gb--2011/sty-exporters-and-importers-in-great-britain.html 3 http://www.accountancylive.com/croner/jsp/editorialDetails/category/Development/Business-Development_-601070/editorial/Small-practitioners-ignore-SME-foreign-currency-risk 1 2

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Managing risk to protect your bottom line

Foreign exchange exposure Doing business internationally will generally bring some element of foreign exchange exposure but even that term, ‘exposure’ is a bit of a misnomer. There is no reason to be exposed at all when venturing into the realm of foreign exchange management. As with every other area of your business, if you do a little research and plan ahead you can manage exchange rates with little or no risk and any risk you do allow can be measurable and controlled.

The key is to plan and ensure you have access to tools which will help you mitigate the risk and take advantage of opportunities as they present themselves.

The no risk solutions Ultimately, if you want to remove all risk from your currency exchange, then a sound tactic would be to buy or sell every cent of your foreign currency as soon as you know you have a requirement. You will have a fixed exchange rate to cost against, to plan sales brochure pricing, to plan projects etc. To do this straight away, one of your options would be to enter into a ‘Spot’ contract with your bank or broker and exchange funds usually within 2 working days.

If cash-flow doesn’t allow for

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that – and it rarely does – a ‘Forward’ contract would be the next best thing. Agree an exchange rate today but delay the actual exchange of funds until a suitable date in the future.

With some specialist brokers that could be up to 2 years ahead and with most brokers and banks a security deposit will be required.

That may be in cash form or banks will sometimes take a charge over a proportion of your current account balance for their security. With a Forward contract, you have all the advantages of a Spot contract, notably the fixing of the exchange rate, but with the added ability to hold onto the majority of your working capital for the interim period.

How much do fluctuating exchange rates affect my money transfers?

sell the US Dollars on a Forward contract at $1.52 to the Pound.

As at 1st November, when the payment was received from the customer, the prevailing exchange rate was $1.60. Through good risk management and a fairly simple hedging tactic, the exporter saved £6,578 on the contract by fixing the exchange rate at $1.52.

The downsides of Spot and Forward contracts are that you cannot alter the exchange rate if it improves and also that some or all of your cash will be tied up in deposit.

Managing risk There are other ways to protect against exchange rate movements but retain the ability to benefit from positive exchange rate movements as well.

Example 1 To demonstrate a Forward contract imagine if on 1st August 2013, a UK based exporter invoiced a US customer for $200,000. They are due to receive the funds in 90 days. The exporter called his currency broker and discussed the likely direction of the Sterling – US Dollar exchange rate. As the trend was moving the exchange rate in the wrong direction for the exporter’s needs, the decision was reached to immediately

You could cover only a proportion of your requirement

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Ultimately, if you want to remove all risk from your currency exchange, hedge your foreign currency as soon as you know you have a requirement.

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and leave yourself some flexibility to take advantage of beneficial rate movements in that way.

As an alternative, you may choose to place what is known as a ‘Stop Loss’ order. This is a facility available through some currency brokers. Choose a worst case exchange rate and place an order to guarantee that rate as a bare minimum. As long as the exchange rate stays above your level, your order remains as a dormant protector but if the exchange rate drops through your nominated level, your order is triggered and you will have bought or sold your currency.

The next step is to decide whether you want to convert that into a Forward contract or settle straight away on the Spot.

Example 2 A company in the UK has borrowed ¥360 million in a loan from a Japanese parent company. The exchange rate for the loan is set at ¥120 to the Pound in January 2012. The loan is to be repaid in three £1 million tranches on the anniversary of the loan date. The subsidiary company has three main options:

the requirement on Forward contracts to guarantee the exchange rate and ensure the repayment value doesn’t increase no matter what happens to the Sterling – Yen exchange rate. (c) Manage the risk of deterioration in the exchange rate through Stop Loss orders and take advantage of advantageous moves through Forward contracts as and when those opportunities present themselves.

As at January 2013, the SterlingYen exchange rate was ¥140 to the Pound and as at November 2013, the rate had climbed to ¥160. Delaying the purchase of the 1st tranche could have equated to £142,000 of savings on £1 million worth. If the other £2 million was covered at ¥160, the total saving on the loan would have been £642,000.

(a) Do nothing and hope the exchange rate doesn’t worsen over the three year period. (b) Purchase the whole of

If you are tendering for new projects or contracts, you might choose to make use of an ‘Option’ to ensure you have the ability to convert funds at your costed levels no matter what happens in the currency markets.

An Option gives you the right to convert a set amount of currency at a guaranteed exchange rate but you are not obliged to do so.

So it allows you – as with a

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Stop Loss order - to set a minimum exchange rate but unlike a Stop Loss order, you can choose whether to exercise your Option or not even if the chosen level is breached. That extra flexibility will cost you an upfront premium but, if it works for you after you’ve done the maths, it can be an effective alternative solution.

There are other occasions where an Option is useful. It is ostensibly a perfectly suitable hedging tool, cutting exchange rate risk but offering some flexibility where that ability to decline the use of the Option is a useful advantage.

As a result, Options are often used for long term planning or for situations when the total volume of the currency requirement may need some flexibility.

“

I would like to congratulate you on your sales approach.

You have taken the time to regularly follow this up, without becoming intrusive.

Few people have the tenacity and diligence to carry this out - well done.

”

Corporate Customer

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Spend time on the detail Further management of your currency needs will be driven by personal preferences, business structure and availability of other solutions. If you are buying currency through your bank or a broker, you can ask them to pay your suppliers directly but negotiate the telegraphic transfer fees and agree the best payment solution for your suppliers. That may mean a SWIFT transfer for currency payments, a CHAPS, BACS or Faster Payment transfer for Sterling payments within the UK or the lower cost SEPA transfer within Europe. All carry differing costs and delivery timescales so it is worth exploring these before you make a costly mistake.

For receipt of funds, try to ensure you get an electronic transfer rather than Bankers Drafts or currency cheques which will have to be sent for either collection or negotiation with the paying bank. Whether you have a draft or a cheque drawn in a foreign currency, it will take 6 to 8 weeks to get your cleared funds and will definitely result in unexpected costs and, where the cheque is negotiated, the exchange rate is likely to be appalling. They are best avoided.

If your payees demand Drafts, try to avoid this at all costs.

You may choose to buy your currency in bulk, take that currency into your own currency accounts and organise your own international payments. Your bank is likely to have a payments system you can use for that; usually an online solution. If your payees demand Bankers Drafts, try to avoid this at all costs. A draft sent through the mail which doesn’t arrive will tie you up in hours of hassle and require indemnities before a replacement can be issued.

If you are receiving funds you may need currency accounts.

That isn’t necessary if you send funds through a broker who will be able to receive your funds in currency and convert to Sterling but it is a regulatory requirement that the Sterling is paid to an account in your company name if the funds have been received from a third party. Currency accounts are not expensive to run but the overdraft interest rate

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is linked to the base rate of the currency’s home country and can even be set at a penalty rate and that could be as much as an annualised 30%. So ensure you avoid overdrawing your currency accounts.

Ultimately the choices you make on your foreign exchange are a compromise between cashflow, business structure, clients’ payment decisions and your own appetite for risk. However, whatever your final decision, it is worth discussing the options and opportunities with your bank or a specialist broker to get a full understanding of the tools available to make your expansion into new overseas markets as smooth, trouble free and profitable as possible.

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Are you getting the best currency deal?

Find out today by registering for your FREE currency audit.

Make the informed choice. Switch to Halo Financial for all your international money transfer needs.

• Expert FX Dealers specialising in supporting SME businesses • Better exchange rates and service compared to your bank • 5 out of 5 star rated from feefo.com and OPP Gold Award Winners • The advantages and support of an inhouse FX department, without the costs • No commission, immediate execution and fast payment

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Put your currency provider to the test.

Spend a few moments today, save ‘000’s tomorrow. Call our friendly, expert team if you have any questions and for a no obligation quote or a free currency audit.

Call +44 (0)20 7350 5470 or visit www.halofinancial.com/sme

“

Halo Financial has been invaluable in planning our foreign currency requirements. They have kept us in touch with the markets and provided accurate market analysis enabling us to hedge our foreign currency risk. As a result we have been able to achieve significant savings compared to our previous currency provider. We particularly like the personal service and prompt attention we receive from the whole team and definitely recommend their services.

”

Financial Director, Global Media Publisher

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Halo Financial Limited 11 Ivory House Plantation Wharf London SW11 3TN United Kingdom Telephone +44 (0)20 7350 5470 Fax +44 (0)20 7350 5475 Email Web

help@halofinancial.com www.halofinancial.com/sme

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727.

Her Majesty's Revenue & Customs MSB registration No. 12197454. Registered in England No. 5155787. Š 2014 Halo Financial Ltd.