Understanding Foreign Exchange Rates: Tips for Small Business Owners
August 8, 2019
If you’ve ever had to look into currency exchange rates, then you know it’s an exhausting task. The numbers can be confusing, and day to day, ATM to bank, or airport to airport, these numbers can change based on the institution that you’re exchanging with.
Individual travellers are especially targeted for higher exchange rates because they exchange smaller amounts of currency in high-traffic, tourist-heavy places.
Everyone is trying to earn a profit from the individuals or businesses they exchange money with.
As a small business owner, if you’re thinking about or have hired overseas contractors, the foreign exchange market is a difficult place to navigate, but it’s not impossible. There are many ways to save money when you exchange it, the trick is to know where to look and to understand what you’re looking at.
What is a foreign exchange rate?
According to Investopedia, financial institutions, investors, and speculators are constantly buying and selling large lots of currencies, which creates the current market exchange rate between two currencies.
In general, currency exchange rates are quoted against the U.S. dollar, pound sterling, euro, and Swiss franc as those are the most stable and widely used currencies for large business transactions.
The global economy does not sleep. And as economies strengthen or weaken, a country’s currency will also experience ups and downs. Trade plays an important role in this equation, as we saw last week when President Trump announced a 10% tariff on $300 billion of Chinese imports. With this announcement, the markets saw a steep drop. And in response, China also devalued the Yuan as a form of currency manipulation.
A few definitions
Before we get into the nitty-bitty, here are a few key definitions you should keep in mind:
Mid-market Rate – The mid-market rate is the midpoint between the buy and sell prices of two currencies. The midmarket is how institutions determine their rates. If you were to Google the exchange rate between two currencies, let’s say CAD to USD – that number is the mid-market.
Spread – A spread is a fee that the exchange institution charges. This is why you will never see that “Google mid-market value” when you use any institution either online or in-person to exchange your money. Spreads are not disclosed and are built into any foreign exchange rate that you are given. Spreads can be anywhere from 0.07 – 7% above mid-market rate.
If there is anything you should take away from this article, it is to understand these key terms when you exchange currency. Understanding the mid-market rate and spread can help you get the best bang for your buck.
Why does this matter?
For small business owners, there is a lot of good that can come from hiring overseas. It can save you time, money, and the ability to outsource tasks or fill gaps in your workforce.
And, when it comes time to pay your contractors overseas, chances are you’re changing the money to your contractor’s local currency.
As the employer making the payment, the charges associated with this are going to fall onto your shoulders. You want your contractors to receive their full payment in their local currency so you will need to factor the costs of any conversions into your budget.
SMB’s take a bigger hit when it comes to these exchange rates because the larger corporations don’t have to worry about the high fees. They have enough business and enough money in the bank that allows them to exchange their currency with little to no fees.
As older institutions, banks often have the highest rates compared to their modern counterparts like Veem.
There is no such thing as too much research when it comes to getting familiar with and saving the most when you exchange currency. Banks are a minefield when it comes to currency exchange but you also have to pay attention to online platforms as alternatives. Some of these alternatives will charge a percentage of transaction as a fee and as a foreign exchange rate.
See how Veem can make your business payments simple.