Small businesses leaving themselves vulnerable to currency fluctuations

Research by East & Partners commissioned by WorldFirst, a global digital payments and financial services platform for SMEs engaged in cross-border trade, has found that Australian small businesses are missing out on valuable Foreign Exchange (FX) opportunities and are more vulnerable to currency risk stemming from mounting interest rates and persistent inflation.

The research found that despite nine out of 10 importing/exporting SMEs placing five transactions per month, the majority of these businesses have not considered FX solutions. Specifically, SMEs in the Australian Forward Market make up only 14.2 per cent of the total business FX daily volumes, whereas upper commercial and corporate contribute 40.1 per cent of average daily volume. Over 80 per cent of microbusinesses and SMEs have never traded FX Options and over 40 per cent have never traded Forward FX.

The report noted that FX Options can be more complex and riskier than Forwards, hence the firms that do trade FX Options are predominantly mid-market to large enterprises. Meanwhile, whilst SMEs prefer Forwards, these risk mitigation solutions are still underutilised. East & Partners noted that this is significant given most small businesses deal with more than one currency and are more prone to foreign exchange risk than others.

“A main reason why SMEs lag when it comes to FX trading is because of apprehension and misunderstanding of the FX tools available,” Jim Vrondas, Head of Commercial, Australia and New Zealand, at WorldFirst, said.

“However, SMEs can use forward contracts to hedge against and undesirable exchange rate outcome and to lock in an exchange rate for up to 24 months,” Vrondas added. “These solutions can help increase certainty for small businesses paying overseas suppliers and are an ideal way of protecting profits against a backdrop of volatility.”

According to East & Partners, of the small businesses already engaged with FX, 61.3 per cent both import and export.

“When the Australian Dollar trades lower Australian SME importers are less likely to hedge,” Vrondas explained. “This is risky because their costs are going up as it keeps going down and no one knows with any certainty at what rate or point in time it may stop. The lower AUD is better for exporters, SMEs selling overseas are seeing increased profits and they should consider hedging should the AUD start to rally higher at some point.”

The research also found that the US, China, and New Zealand are the top international markets for expansion for Australian businesses. But when entering new markets, 75.9 per cent of businesses cite issues with international payments as key challenges. Lack of visibility in inbound payments being received, lack of tracking in outgoing payments, delays in receiving payments from overseas customers are among these pain points.