If you deal in foreign markets, you will no doubt have noticed increased volatility in the AUD exchange rate recently and have a greater need to manage this.

Because Australia has a floating exchange rate, its currency will always fluctuate when there are changes in its economic performance, capital flows, inflation and interest rates. And these currency ups and downs can affect your business.

A rise in the value of the Australian dollar against other currencies will make imported goods and services cheaper to buy, while your exports will become more expensive for consumers in foreign markets. Conversely, a fall in the Australian dollar means that imported goods and services cost more to buy, but your margins on exports will improve.

The bottom line is that if you deal in more than one currency, you may experience foreign exchange risks which can erode your profit margins and constrain your cash flow.

Risk management strategies for import-export businesses

Invoice in the local currency

You can reduce your exposure to currency swings by invoicing offshore customers in Australian dollars.

Diversify your foreign exposure

Trading with customers in multiple countries and currencies can help reduce your currency exposure because it spreads the risks.

Forward exchange contracts

These binding agreements involve exchanging a set amount of currency at a given exchange rate on a specific agreed future date. By locking in the exchange rate, you gain certainty on how much you will receive or pay, no matter how the Australian dollar trades. This will help you to budget and better manage your cash flow. However, you could miss out if the exchange rate trades in a direction more favourable to you before the agreed date.

Foreign currency options

This is like insuring against adverse movements in exchange rates. You sign a contract that gives you the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. For this, you pay a premium.

Unlike forward exchange contracts, you are not contractually bound to honour the contract if the exchange rate moves in a more favourable direction ahead of the agreed date. You can abandon the contract and instead, use the currency’s spot price. The maximum cost to you will be the premium paid.

Foreign currency bank accounts or loan facilities

This involves depositing your foreign currency in a bank account for later use. Alternatively, you can borrow foreign currency to pay for purchases instead of having to convert from local currency.

A perfect hedge

Here, you would match any outgoing foreign currency payments against foreign currency inflows received on the same day. But according to CPA Australia, this method is rarely used because it is difficult to time cash inflows and outflows to happen at the same time.

Trade finance

This involves obtaining short-term working capital finance in forms such as letters of credit or bank guarantees. It helps you bridge the funding gap between the time you pay for any foreign transactions and the time you get paid.

Trade finance providers, such as ScotPac, may also provide other services – for example, help with trade documentation and compliance with trade regulations.

Finding a Trade Finance solution to suit your business

Looking for a funding solution to suit your unique import/export needs can be challenging. For a business owner, the three most important things to consider are speed, flexibility and the product’s fees, terms and conditions. Do your research and choose carefully to ensure you’re making the right decision for your business.

Trade Finance with ScotPac

ScotPac has been helping Australian import-export businesses bridge cash flow gaps and navigate upfront payments and tricky import terms with customisable Trade Finance solutions for decades. Our Trade Finance facility is more affordable than overdrafts or credit cards and offers businesses the option to fund inventory or raw materials locally or from overseas.

Plus, our new partnership with global financial services firm Ebury is making trading on a global scale faster and more accessible for all businesses. The collaboration provides businesses with ready access to ScotPac’s working capital solutions, and Ebury’s global expertise in foreign exchange and cross-border payments.

Other benefits include:

  • p to 150-day terms, funding up to 100% of the order value.
  • No term and no minimum monthly fees.
  • Generally, no property security required.
  • Flexible facility to fund the stock holding period for B2B or B2C sales.

To find out more about our Trade Finance solutions or to discuss your goals for your business, get in touch with your local ScotPac office today.