FX Risk Mitigation
for SMEs

The biggest difference between a small business and a big business is their size. And while that may sound obvious, it’s at the heart of the many challenges small or medium-sized enterprises (SMEs) face when it comes to international payments.

“Global corporates trade in millions of dollars at a time, whereas SMEs come in at $10 000 or $15 000 per transaction,” says Paul Fenwick, CFA: Digital Markets at Absa CIB. “So from a foreign exchange (FX) point of view, there’s less need to be as sophisticated and diverse in the products SMEs use. And honestly, if you’re a small manufacturer or a farmer working in the agri sector, FX is often not your biggest pain point. Just being able to settle a transaction is usually where you would focus your attention.”

Yet small businesses face big risks when they do business across borders. SMEs across industries – from agriculture to retail, manufacturing and more – need to know what those international payment risks are, and how to mitigate them.

In Fenwick’s view, the biggest risk SMEs face is currency volatility. Yet, as he explains, that’s also where some of their biggest missed opportunities lie. “It’s no secret that the rand is one of the most volatile currencies globally against the US dollar, and we sometimes see massive exchange rate swings,” he says. “The question for SMEs is: How are you hedging yourself against that volatility risk? If you’re just coming in and booking a transaction whenever you need to make the payment, you would be using a very basic spot product.”

The “spot” exchange rate, Fenwick says, is the exchange rate you’ll be offered right now, today. “When you expose yourself to spot products you expose yourself to all types of associated risks,” he says. “Everything that happens in the world – from political news to economic news – impacts that spot price. That’s why it’s the most volatile FX product.”

Fenwick suggests taking a forward, but warns that there are pros and cons to that choice, too. “Some clients say they don’t want to take a view on the rand, and they just book when they need to,” he says. “What they don’t realise is that by taking that stance, they are actually taking a view – and they are exposing themselves to whatever might happen between now and when they need to make that booking. There is a lot of risk associated with that. With a forward, you know what you’re going to get.”

A customer foreign currency account provides another natural hedge. “If you’re both importing and exporting, it’s a good solution to help you hedge the exchange rate risk without necessarily taking out forward cover,” says Fenwick.