Foreign currency and exchange rate risks
Banking overseas and UK-based foreign currency accounts
You may want to consider opening a foreign bank account to help manage your business' currency and exchange risks. Alternatively, most UK clearing banks offer euro accounts, as well as accounts in other foreign currencies.
Opening an account with a bank overseas could be beneficial if you will be making or receiving lots of payments in a foreign currency - especially lots of small payments.
The advantages of this could include:
- Because your money will be held in the local currency, you can wait for the exchange rate to become more favourable before converting it - as long as you don't need the funds immediately.
- A bank in the country with which you're trading will be fully conversant with the rules and regulations regarding transactions in that country, and your customers might prefer to deal with a bank in their own country and in their own language.
However, the disadvantages could include:
- An overseas bank may not offer the same level of protection and redress as a UK bank.
- Setting up an account overseas can be a long-winded process and some countries have complex rules on who is entitled to open and operate a bank account.
- You may experience communication difficulties.
UK-based foreign currency accounts
Foreign currency accounts can be a good option for importers and exporters as they allow you to 'net' receivables and payables in the same currency. This allows you to hedge against exchange rate changes by keeping money in the account until the rate is beneficial to you.
This solution suits businesses with:
- a large number of dealings in a particular currency
- a strong cashflow - which means they're unlikely to require immediate access to funds
- a need to hold currency for future payments
Using a foreign currency account based in the UK allows you easy access to your money while also allowing you to discuss transactions in English with your own bank.
However, there can also be some disadvantages to this, including:
- If you need to convert funds in your foreign currency account into sterling for UK use - eg to ease cashflow - you will face a loss if the pound is strong against that currency.
- You may also have to wait a long time for the exchange rate to move in your favour - and it may never do so.
- Banks tend to charge ongoing fees for these types of accounts.