The Brexit vote has tossed the small business community into the headwinds of foreign exchange volatility, and U.K. companies aren’t the only firms forced to take a look at their global strategies. The U.K. referendum enlightened SMEs everywhere operating across borders that FX volatility can pose a threat to their business, but can also be mitigated.
Days before the Brexit vote was decided, Western Union Business Solutions got an early jump on raising awareness of FX management for small businesses. The company expanded its foreign exchange management services into Hong Kong with the launch of FX Options, a tool to help SMEs hedge against FX risk when conducting global trade, as well as the Hong Kong debut of its new EDGE online platform for cross-border SME trade and FX transparency.
According to Western Union Business Solutions head for APAC, Middle East and India operations Simon Glendenning, Hong Kong deserves some attention when it comes to corporate foreign exchange management.
In the last decade in which Western Union Business Solutions has been operating in HK, said Glendenning, companies there have heightened their demand for online financial solutions, and faster payment settlements.
Hong Kong has made it a point to increase its attractiveness for multinational corporations as of late. Earlier this year new legislation came into effect in the city that encourages treasurers from MNCs to set up operations in Hong Kong, only adding to the demand among companies in the area for better FX solutions and risk mitigation tools.
“More businesses in HK are internationalizing, and we see a real gap in how SMEs are being served today,” he explained. “Barriers exist for SMEs, which are not the same for larger businesses, such as access to dedicated customer support, accessible business intelligence, simplified reporting and invoice management or centralized collaboration with buyers and suppliers.”
The more than 320,000 small and medium-sized enterprises in Hong Kong, the executive noted, represent an opportunity to overcome these obstacles and make it easier for small businesses to hedge against FX risk and make better business decisions with FX visibility.
But small businesses are rarely found to be mitigating FX risk to the full extent.
A study released by Western Union Business Solutions earlier this year found that the majority of SMEs aren’t strategizing to leverage the strength of their local currency amid a strengthening U.S. dollar.
In Hong Kong, Glendenning added that SMEs are similarly lacking in their use of FX management strategy. Only 16 percent of Hong Kong companies, for example, are actively protecting the cost of an international invoice that can be impacted by foreign exchange volatility, he said.
While the Hong Kong dollar is pegged to the USD, businesses in Hong Kong aren’t only working with the U.S. dollar, Glendenning noted, with more than two-thirds of companies in the city doing business with at least three countries.
The executive said 56 percent of businesses in the city find out the true cost of an international invoice only after it’s been paid, Glendenning said.
“This becomes a real problem when you consider the knock-on effects, which happen when the cost runs higher than expected, and many businesses in Hong Kong combine different coping strategies,” he noted, explaining that the majority of companies dip into their working capital to cover the cost of unexpectedly high invoices. One-fifth are forced to lower profit margins, and 15 percent turn to borrowing capital to cover the cost of the bill.
“The cost of borrowing further exacerbates the problem,” he said. “We see a real opportunity to mitigate this risk.”
But Hong Kong isn’t the only market in which businesses, especially SMEs, are struggling to get a hold of their FX strategies. But with Brexit exposing the risks of FX volatility in a massive way to companies of all sizes across the globe, small businesses can no longer afford to be left out of this space.
“We see the gap really emerging from lack of awareness of what alternatives are available for SMEs, as there is a belief that intuitive online platforms and hedging products are expensive and only for big businesses,” he said.
This doesn’t mean, however, that small businesses should expect to suddenly enter into practices on the scale of big corporations. SMEs, Glendenning said, need to first focus on making sure they are aware of their financial position in the global market.
“We see too many businesses wanting to profit from FX, which is very risky,” he explained. “No one knows where the FX markets will go from one day to the next, so our approach is to help businesses understand their exposure in HKD, and look to protect their profit margins.
“They should generate revenue from their goods and services, not from foreign exchange,” he continued.
And with Brexit in the picture, SMEs need to be especially stringent in their FX practices.
“In times of uncertainty, we recommend that people focus on their core business and take a risk-based approached to managing their foreign currency exposure,” Glendenning said.