Looking to expand overseas? The challenges and pitfalls

Claire Hogarth25/Nov/2014Currency Updates

Expanding overseas can prove to be the ideal way to grow a business. There are many things to consider when conducting research in to a new market whether it’s arranging new suppliers, launching a product, hiring additional staff or understanding local trading regulations.

As with any new business venture, there are associated risks, and one of the biggest problems faced when expanding overseas is dealing with foreign currency. In a sophisticated and dynamic global market, complicated by national quirks and international instability, arming yourself with the best market insight and local knowledge is one of the most valuable business assets and should be considered across the organisation.

Foreign Exchange

A survey by the Economic Intelligence Unit revealed that SMEs are becoming increasingly aware of the need to prepare for a broad array of foreign exchange risks. It states that rising UK operating costs and weak economic growth are the main concerns attributed to international expansion. Whilst there is clearly an appetite for growth, the survey also stated that SME financial directors often do not fully understand or sufficiently hedge for foreign exchange risk. A lack of local market knowledge and an absence of sufficient internal systems were revealed as contributing factors, leaving companies vulnerable to potentially losing millions of pounds.

In order to counteract market volatility, it is vital to understand the risks posed by foreign exchange and implement a robust currency policy to protect your bottom line. Market volatility is the swings in the rate of a currency and can be affected by a wide variety of issues, including geopolitical news and institutional intervention. Predicting these changes is difficult but a sturdy risk strategy will ensure companies can protect themselves from falling rates and still make the most of market upswings.

Emerging markets

In the UK, many SMEs look to emerging markets in particular to fuel business growth. These markets often contain different business practices, regulations and logistics and so SMEs open themselves up to a number of additional risks that have not previously been accounted for. This includes coming face to face with obscure emerging market currencies. These currencies represent greater risk, with even the most seasoned companies failing to comprehensively mitigate their exposure. Emerging market currencies are traded in lower volume than the standard G10 due to the higher risk associated and the related bank charges, which can be off putting. These bank charges can be avoided by working with a specialist currency provider but risk mitigation remains the key differentiator as large swings in these exchange rates are not uncommon. Finding a specialist with experience working with your desired market is very important as the initial challenges, if managed correctly, can present many business opportunities.

Fighting large market swings and achieving liquidity are problems when working with emerging market currencies and for some SMEs, prove to be too much of a challenge. Overcoming these obstacles though can deliver long term benefits as the ability to pay a supplier in their home currency is proven to secure lower costs, as the other party no longer has to factor currency fluctuation into their prices.

Security and the banks

One important aspect to always be on top of is security.

Using a bank may seem like an obvious choice for SMEs; their name, prominence on the high-street, and imbued sense of security all work in their favour. However it is important to consider how a large corporate bank may view your foreign exchange transactions. Are your payments going to be dismissed as ‘nuisance payments’? Are you going to get all the benefits a larger client would experience? There is a risk of being a small cog in a big machine, with no personalised service or specialisation in the markets with which you wish to trade. That is where alternative currency providers can prove more beneficial and offer the proactive service every business needs in order to expand overseas.

Working with a HMRC registered and FCA regulated broker means security is not a cause for concern. Ebury operates strictly segregated client accounts per FCA regulations and is registered with the ICO under the Data Protection Act. Therefore you can set security fears to one side and focus on running your business.

As the business world continues to get smaller, having the ability to deal with a multitude of currencies will prove worthwhile and allow your business to expand its global footprint in an effective and efficient way.

To find out more about currency services, enquire online.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.