Hedging Currency As A Small Business Retailer

So when I found that my airline Frequent Flyer card could also be used as a pre-paid credit card in local currency, I immediately transferred some cash into it, and watched the exchange rates daily.

Exchange rate fluctuations can seriously affect the profitability of a product in your store. Not only is there the actual unit cost, but also the freight to get it to you, and both of those amounts will change, depending on the exchange rate for the day.

I’ve seen many small businesses that order a small shipment of stock, for say, a thousand dollars, but by the time the payment comes due, the price may have changed by hundreds of dollars. Those dollars could mean the difference between a profitable product, and one that ends up costing you money.

There are a few options that you can utilise, when it comes to hedging your currency.

If you have the funds upfront, you can use a pre-paid card, like the one I used when I went to New York. So how to these cards work. Essentially you use them like you would a visa debit card, or a credit card, but you have to load funds into the card, and once they run out, they run out.

The great thing, is once you’ve converted the currency, you have a set amount. You’re no longer affected by currency fluctuations and you aren’t subject to those pesky currency conversion fees on every transaction.

The downside, if you want to call it that, of this method, is that your funds are tied up, until you use them.

There’s an opportunity cost that comes with not being able to access your funds immediately, but there is also the benefit that comes with the security that the amount you have available isn’t going to change.

The next option that you can use is Forward Rate Agreement, also known as a Forward Foreign Exchange. Utilising your financial provider or foreign exchange company, you simply fix an exchange rate for a date in the future. If you do this often, you may qualify for a line of credit associated with the account, meaning you only have to pay, when the exchange is due.

This ensures that you know exactly how much an order is gong to cost you, ahead of time, which allows you to plan and forecast your cash flow.

And my last, super simple way to hedge our currency, is to use Paypal. If you’re already using paypal as a payment gateway for your online store, did you know you can convert currency at any time? Simply log into your account, and find the Manage currencies option. If you have the old interface, it’s in the top right of your overview screen, and if you have the new interface, it’s in the money section. From their, you simply choose a currency, and how much you want to exchange. Once you have exchanged the currency, again, it’s a set amount.

And, being able to track and forecast your cash flow, can put you in quite an enviable position compared to your competitors. Having that advantage, can save you thousands of dollars every year.

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