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How can SMEs keep cashflow flowing smoothly?

It is often said that for a business, profit may be its food and drink, but cashflow is its oxygen. An interruption in incoming funds can prove fatal and securing credit can be costly. So how can SMEs make the most of the opportunities they have to keep everything flowing smoothly, especially if they also need to think about funding foreign currency transactions?

Though it may seem difficult to believe in the current state of quarantine and closure, it is likely that these types of overseas connections will actually grow.
Though it may seem difficult to believe in the current state of quarantine and closure, it is likely that these types of overseas connections will actually grow.

For any business, the biggest risk is lack of cashflow.  Many businesses that fail are  actually  profitable ,  and it is just the lack of available funds that has  stopped them from thriving. Cashflow is also necessary for growth,  so successful businesses often need to draw on credit too.  It is an essential part of business strategy.  

Credit can be secured on assets, or unsecured. It is always finite  –   there will be a limit to how much you can borrow from a lender, and a deadline when it needs to be repaid.  There are many companies who provide trade finance or credit solutions and the  important thing is to make sure the cash keeps flowing .   

Cashflow and foreign currency transactions 

Businesses with overseas suppliers or customers are likely to be dealing in currencies other than the Australian dollar. With currency rates fluctuating continuously, this can prove a considerable challenge. Over the last year, rates have been volatile, with some rates fluctuating up to five percent in a month. So, for example, a regular payment for the same value of US dollars, can cost wildly varying amounts in Australian dollars from one month to the next. SMEs facing this kind of uncertainty often find that they need a hedging strategy, so they know exactly what their incomings and outgoings will be in Australian Dollars.  

A hedging strategy is likely to include products such as  forward contracts,  market orders or vanilla options.  These often require deposits to be paid, and if  a business is  holding a number of forward positions at any one time,  it  could have a large amount of cashflow tied up .  

Specialist providers 

If this is the case, it can pay to keep currency transactions separate from the main banking relationship. A business may have a line of credit with their bank, and if they also want to start hedging their currency requirements, this may need to be funded from the same line of credit. So, to ensure that their credit facility is always available, many SMEs choose to take their international payments and receipts to a specialist provider who will work with them to establish a hedging strategy that meets their needs.  

There are many advantages to working with  a  specialist currency broker .  Any credit line that  is   taken  out with them will  just  be  to fund currency transactions, so it will be  completely separate from credit at the bank .  It will also be unsecured,    whereas   banks  will usually  want  charges and debentures on a company’s assets .  So ,  it is an extra credit facility that complements the loans and overdrafts offered by the bank . Meaning that cashflow is protected.   

A currency provider  will  want to  get to know your business  thoroughly  before offering a hedging strategy . This will help them  assess what kind of products will work well for you.  And because they  know you well, they can offer a quicker turnaround on credit decisions than  most  banks  can,  depending on the urgency of the situation.   

Western Union Business Solutions – putting SMEs in control over their international transactions 

Western Union can offer customers access to over 130 currencies in 200 countries and territories, competitive spot rates, optimal routing and select free transfers, as well as a globally leading online platform which not only can help to facilitate online payments and bulk uploads but can also give real time access to positions and market to market valuations. 

With a qualified team of currency experts and a service tailored to the needs of SMEs, they specialise in helping  international businesses  to mitigate risk  from currency fluctuations, with a range of hedging tools and strategies. With their wide range of Foreign Exchange services, helpful  analysis and decision support tools, they give SMEs more transparency and control over their foreign exchange and international payments.   

With any hedging tool, there are associated risks. Your foreign exchange provider should explain what these are, so your decision-making is informed, and you are confident and comfortable with the choices you make. It may be that your business is not suitable for hedging products offered by Western Union Business Solutions.