FX hedging is no longer optional. With typical commerce transactions spanning multiple countries and currencies, businesses need to embrace FX hedging to protect themselves from the costly consequences of currency fluctuations.
So… What the heck is FX hedging?
Currency fluctuations cut into bottom lines and tie up working capital. And unfortunately, any SME that operates internationally, or buys and receives payments in foreign currency is at risk of falling foul to changing exchange rates.
This is where FX hedging comes in. FX hedging is a wonderful invention that allows you to remove currency risk by locking the exchange rate at a set price, for a set period. This is nothing new; if you’re a large organization, you’ve been doing this for years. SMEs however have been largely prohibited from FX hedging until now.
Due to the fact that there is no set exchange rate on foreign currencies - The value of one can significantly weaken or strengthen vs. another. This can be on an intra-day, or longer term basis. This, obviously, can prove very costly for businesses that sell in one currency, but buy in another. Or if you must pay salaries in various local currencies due to local currency differences. In essence, this makes FX a finance department's worst nightmare…
So now that we know what FX hedging is and why it can be bad news for financial stability, let’s take a look at why SMEs should hedge their currency risk.
Protection from volatile currency fluctuations
Currencies are incredibly unpredictable, and in uncertain economic times, fluctuations can range from 2-4% to a staggering 10% - all within a dizzyingly short time period. Just look at the recent example of EUR/USD, which has swung a total of 13%+ in the first half of 2022 alone - This is hardly the optimal conditions for financial planning we think you’ll agree!
For a company buying in one currency and selling in another, these spikes and plunges pose a critical risk to their business. What may seem like minor changes can quickly add up to significant sums, with the potential to create everything from revenue loss to an unexpected increase in monthly expenditures. By hedging FX risk, you’ll be safeguarded from such losses.
The gift of FX stability: plan for the future with absolute certainty
(Certain level of) Stability is crucial to running most businesses - any business owner will tell you this. And ensuring consistency across the board, whether it’s from week-to-week or month-to-month is a must for organizations. Consistency and stability are the keys that strengthen an organization so that it can withstand the whims of the market.
FX hedging helps businesses maintain certainty and security between payable and receivables. This is essential for operations and financial planning - which any finance department will tell you is absolutely crucial!
Decisions made at scale, and with certainty
The leadership in an SME is typically small. The likelihood of an SME keeping a financial controller on retainer, who focuses on analyzing their FX exposure and hedges accordingly, is likely slim to none. But hedging every invoice instantly eliminates the need for an expert, and saves invaluable resources on that front. This is a new paradigm we’ve created (and are extremely excited about) called, ‘discrete hedging’.
With discrete hedging you can hedge a specific item in your balance sheet, with no minimum financial or time obligation... This provides you with a way to make the right choices for your business, all the way down to the smallest detail … We know, wonderful right?!
Greater convenience for your customers
If your customers are interested in doing business in their local currency, FX hedging can make that a whole lot easier. This gives your customers the instant results they crave, setting your business apart from the pack by offering much sought-after functionality. Agility is more important than ever, and FX hedging provides the ability to both you and your clients to respond swiftly to market fluctuations and make important decisions quickly.
Offer your customers above-and-beyond simplicity
In a sea of clunky, slow-moving solutions, SMEs need a fully automated solution that streamlines the entire FX hedging process. However there is a major problem here - traditional market solutions either don’t work or are too expensive. This is precisely why less than 20% of SMEs use a currency hedging solution, compared to 90% of enterprises. Something clearly isn’t adding up…
Functionality that goes beyond what’s par for the course can provide your organization at a major competitive advantage. In a crowded market, bells-and-whistles features and benefits can give your organization the edge it needs to resonate with potential and existing customers alike.
Why traditional banking solutions don’t work for SMEs
While banks do play a role in the SME ecosystem, they’re quite simply not built for SMEs - especially those looking to hedge FX risk. The vast majority of banks’ policies and processes are geared towards larger enterprises, and are not suited to the specific challenges facing SMEs. Here are some of the main reasons for this:
Unaffordable bank fees
It’s less profitable for banks to work with SMes due to the smaller sums of capital involved. This means that the solutions they do offer don’t really meet SMEs specific needs, and are often ludicrously expensive…. And banks’ preference for larger players shows no signs of changing anytime soon.
Major collateral requests
Banks view working with SMEs as a risk, and they demand collateral accordingly. While requested collateral could be equivalent to pocket change to a larger corporation, for SMEs, they have the power to make or break a business and create a significant impact on day-to-day finances and functioning…
That’s not to mention that for SMEs with tighter budgets, delivering the kind of upfront collateral that would satisfy a bank isn’t feasible. Many SMes are focused on growing to scale and continuing their operations, this means they simply don’t have the cash or collateral on hand to spare. Collateral ties up operational capital, and that’s a price many SMes are unwilling (or can’t afford) to pay.
High operational friction
Banks are focused on partnering with larger industry players, and their policies reflect that preference. Due to this traditionally-minded approach, employees are often unfamiliar with more agile maneuvers, like discrete hedging.
Clerks don't have the relevant knowledge to guide or support SMEs with their FX hedging. It can take days (or even weeks) for clients to perform a specific hedge, which is a major setback in a space where there is a tremendous need for speed.
It’s clear that SMEs looking to begin hedging for FX risk are unlikely to find an enthusiastic or viable partner in a bank. The good news is that there are platforms which can empower SMEs with FX hedging tools that make the process both accessible and straightforward.
Grain’s SME-focused hedging solution
Grain’s fully-automated hedging solution takes the guesswork out of analyzing FX exposures and calculating next steps, Grain provides SMEs a currency hedging tool that’s more critical than ever during uncertain economic times.
Our solution can be seamlessly integrated into your company’s existing IT or Finance infrastructure for easy adoption. Oh and did we mention that our solution is up to 8x cheaper than using banks? In a volatile market, we’re here to help you strengthen your business’s stability.