Navigating foreign exchange - What every business should know

If your business deals with suppliers or customers abroad, you’ve likely encountered the costs and complexities of foreign exchange. But what exactly is foreign exchange, and how can you avoid unnecessary fees while making your international transactions more efficient?

What is foreign exchange (FX)?

Foreign exchange, or FX, is the process of converting one currency into another. Since you can’t simply pay a foreign supplier or receive payments from international customers in DKK, efficient currency trading is essential for managing your global business transactions. Whether you’re handling payments to overseas suppliers, receiving funds from foreign clients, or managing cash flow across diverse markets, effective currency conversion is fundamental to maintaining healthy profit margins and smooth operations, especially for SMEs dealing in multiple currencies.

What should you be aware of when trading foreign currency?

1. Exchange rates and fluctuations: The exchange rate is the price at which one currency can be exchanged for another, and it varies constantly due to market conditions. Small fluctuations can add up, particularly if your business frequently deals with foreign currencies. Timing your transactions can help minimise costs.

2. Hidden fees and transparency: Many banks and financial institutions markup exchange rates and add hidden fees. This lack of transparency can make it difficult for businesses to understand the actual cost of their transactions fully.

3. Transaction timing: FX rates can be volatile due to changes in global markets, so the timing of your currency exchanges can affect the overall cost. Having a solution that helps you manage these risks is crucial.

Fees and costs – What you should know

The fees associated with currency trading can vary widely depending on the institution you use. When exchanging DKK 1 million, typical costs can range from a few thousand DKK for common currencies like EUR or USD to as much as DKK 15,000-25,000 for more exotic currencies such as Chinese Yuan (CNY) or Indian Rupee (INR). Moreover, many banks include a "spread"—an additional cost above the base exchange rate you might see on currency comparison websites like valutakurser.dk. This spread, along with potential fees for transfers and payments, can significantly increase your overall costs.

For example, some major banks have recently raised their fees by up to 33%, making it even more expensive to trade foreign currency through traditional banking channels. This means that the actual cost of exchanging currency might be much higher than the base rate shown online.

Challenges of dealing in foreign currency

Navigating foreign currency transactions can present several challenges for businesses, particularly SMEs. Here are some key issues you might face:

• Timing of funds transfer: When you don't have a local account in the currency you need, it can take longer for funds to reach their destination. This delay can impact your cash flow and disrupt transactions, especially if your suppliers or customers expect prompt payments.

• Cost to suppliers: Suppliers may charge higher prices if they don’t receive payments in their local currency or if they have to wait for the funds. Converting funds into local currency can be expensive for them, and this added cost might be passed on to you. Having a local account in the currency of your supplier or customer can mitigate these additional costs.

• Limited banking services and currency availability: Many traditional banks lack self-service options for currency exchange, requiring you to make transactions over the phone or in person. This can be inconvenient and slow. Additionally, some banks offer a limited selection of currencies, which might not meet your needs.

• Hidden costs and spreads: When converting currencies, banks typically apply a spread, which is an additional margin over the exchange rate you see online. This spread is a hidden cost that can significantly increase the total amount you pay. On top of this, there might be extra fees for transferring and processing payments.

• Exotic currencies and multi-step conversions: Many businesses shy away from trading in exotic currencies, opting instead for more common ones like EUR or USD due to perceived difficulties. Exotic currencies often come with higher exchange costs and are less accessible, which can lead to the need for multi-step conversions. This complexity can make transactions more expensive and cumbersome, impacting your overall efficiency.

• Underestimating foreign transactions: Many SMEs underestimate the volume of their foreign transactions. They often focus solely on their imports, overlooking the significant amount of sales they make to international customers. This oversight can lead to unexpected challenges and costs related to currency management.

Foreign exchange simplified with kompasbank

At kompasbank, our foreign exchange service is designed to provide a straightforward and efficient way to handle international transactions. In addition to offering competitive rates, we focus on simplifying the process for businesses looking to expand into new markets, manage currency risks, or optimise their international payments.

Our goal is to ensure that your company can operate globally without the challenges often associated with exchange rates and banking complexities. By using our foreign exchange solution, you can streamline your operations and focus on the growth of your business.

If you're interested in learning more about how we can support your international transactions, consider booking a meeting with one of our Business Advisors to explore your options.