Small Business Getting Intimate With Bankers | THE POLITICUS

Small Business Getting Intimate With Bankers

The US dollar is at the highest level in seven years against the Japanese Yen, and is at a four year high against major European currencies.  This is a reflection of three factors at work: the relative strength of the US economy vice the European and Japanese; Central Banks' monetary policies; and investment flow, the latest being a derivative of the first two  factors.  We should expect the strong dollar picture to remain with us through 2015, and possibly beyond, as both Europe and Japan flirt with the risk of renewed recessions and their Central Banks stay the course on near zero short term interest rates. While the strengthening US economy is welcome news by all businesses, the strong dollar trend could mean more pain for US exporters. Already, US multinationals such as Proctor and Gamble have reported results that were negatively impacted by foreign currency weakness. But, it is not only multinationals that are impacted. Small and medium sized US exporters have also been affected by these currency movements. The small US exporter, continuing to invoice in dollars, is now facing significant price competition from foreign producers. US dollar prices, while remaining relatively unchanged, are fast rising in foreign currency terms. To counter this negative impact, at least partially, smart small business exporters are learning to quote and invoice in foreign currencies; simultaneously covering their currency exposure through the banks. This, of course, will not eliminate the effect of the strong dollar, but the practice has good benefits for price and competitiveness. When an exporter quotes in dollars, the foreign buyer is figuring into the price the worst possible exchange rate in order to eliminate the risk of a margin squeeze on resale in his country.  To be on the safe side, because of continued currency weakness or slow moving inventory, a foreign buyer may mentally add as much as 10% "reserve" on the quoted cost when negotiating. This is a hefty hidden penalty to the US exporter's price. On the other hand, when the exporter quotes and invoices in the currency of the buyer, he is taking control of the situation. He is, in essence, speaking his customer's language, leaving the customer with nothing to figure out but his normal margin for resale. This is truly being customer centric. Meanwhile, the exporter fully covers his exchange risk with his bank at a predetermined rate that is certain to be more advantageous than the one arbitrarily assigned to the transaction by the foreign customer during negotiations. When the invoice matures and payment is made in foreign currency, the bank will deposit dollars in the exporter's account as if the foreign buyer had done so. 

For small and medium US importers, the case for quickly gaining facility with foreign currencies is even more pressing.  A strong dollar should reduce costs of goods sold. Because of inertia or traditional ways of doing business many US importers still pay their foreign suppliers in dollars. They just don't like to fuss with exchange rates. But some Savvy importers have learned to ask their supplier to invoice them in foreign currencies. In the case of imports from Europe, Latin America or Japan, these importers have realized cost savings ranging from 10% to 17% in 2014 because of the declining value of the foreign currencies. Naturally in the present situation a foreign supplier is happy to keep invoicing in dollars, and may even promise to hold prices steady long term. But this is simply too much margin to leave on the table, particularly in these lean times. Just as in the case of exports, banks will act as intermediaries at the time of payment and deliver foreign currency to the supplier, taking US dollars from your account. This is done at a pre-negotiated advantageous rate to the importer.

Currency movements are difficult to predict, but even at regional and community banks small and medium sized business can find significant expertise that will make this very simple to practice. Advanced foreign currency techniques such as forward hedging and swaps can be made to serve small businesses just as they do for large multinationals. This is a becoming trend in small business finance circles. An international banker friend tells me, he is enjoying intimacy with his small business customers that he had not known before.