In this guest post, Gabriel Grisham of OFX shares how high volume sellers minimize currency costs associated with international transactions.
No matter what stage your business is in, whether you have revenues that are 7 figures or more, or are getting your first product out the door, the goal is the same: turning a profit.
Anyone can start a business and sell a product, but the really successful businesses are the ones that find ways to minimize every cost associated with selling that product. This means finding efficiencies wherever you can, and one of those efficiencies needs to be not just how you move product, but how you move money.
High volume sellers know that moving money between currencies has a cost, usually between 2-4%, and moreover they know that these costs significantly impact their bottom line. As such, they do a few things to ensure they are minimizing their currency costs.
Getting the Best Price
Banks are very good at hiding the real costs of sending money internationally. While wire fees are annoying, for transfers above $2,000, they are usually not the biggest expense.
Banks also charge a foreign exchange (FX) margin on any transfer that involves more than one currency. So while that $45 outgoing wire fee isn’t fun, the $300 FX cost on your $10,000 transfer is where it really hurts.
High volume sellers know about this margin, and negotiate hard to get the FX margin reduced. Getting below 2% is the goal, and the more money you move the more negotiating power you have to get that margin reduced even further.
Maximize Same Currency Payments
If you are in the US and selling products in Europe, you are going to be paying Value Added Tax (VAT). Since you are already making money in Euros (EUR), you don’t want to change those Euros for dollars (USD), only to turn around and send USD back to EUR to make your VAT payment.
High volume sellers will hold balances in currencies that they know they will need to pay out in the future. This saves them roughly 4% on all amounts that first come in, and then go back out in the same currency, rather than converting twice and incurring FX fees twice.
Don’t Move the Same Dollar Twice
If you have income in one currency, let’s say Euros, expenses in another currency (RMB payments to a supplier in China), but operate in a third currency (USD), you want to make sure you are moving money efficiently. Taking EUR revenues, moving them back into USD, and then moving some of those EUR (now USD) revenues to pay for additional product from China in RMB means you are moving the same dollar twice, and not moving money efficiently.
Successful high volume sellers making money in multiple currencies are set up so to purchase additional product using those same currencies. Rather than first converting EUR to USD and incurring an FX fee, then using USD to pay their supplier in RMB (moving the same dollar twice), they will make the payment directly from the EUR revenues, thereby only paying an FX fee once.
Finding a Solution
While this may sound straightforward, getting the right banking infrastructure in place is not. Opening a bank account in the UK as a US company can be very difficult, and often requires getting on a plane and making a visit.
Fortunately, there are companies like OFX that can help you significantly expand your currency management capability with just one application that you can fill out at your desk. Visit us here to find out more.
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.