Last Updated on
If you sell in overseas markets, do you know how much you’re paying to convert those revenues to dollars? And are you getting the best rates? If you buy products from manufacturers and suppliers in other countries, you may be paying a cost known as a “currency conversion buffer” without even knowing it. Foreign currency exchange is a complicated topic and foreign exchange costs can be steep. So we consulted expert Jared Van Orden to help simplify and discover the most common ways to save money on FX.
Everyone can agree that we live in confusing times…
With access to a constant flow of information, comes constant changes to the advice about what we should eat, what we should invest in, and what we should believe, to name a few.
First, “clean eating” is just a common-sense good idea, for instance, then it’s an Instagram near-religion, now it’s a dangerous misconception.
First, cryptocurrency is a monetary revolution, then it’s a failed experiment with fake money, now it’s a speculator’s playground again.
The same synthetic CDOs (collateralized debt obligations) that caused a global financial crisis, are now being sold again under a new name.
From attempting to follow the latest stream-of-consciousness Presidential news conference, to witnessing another wildfire food trend debunked by actual science, nothing calls into question the nature of reality quite like life in this current decade…
The same decade that’s seen the battle between the conventional “experts” and the “post-expert” regular-guys-turned-gurus basically collapse into a waste pile of conflicting news stories that only serves to prove both sides wrong.
Even the word “truth” is a grey area now.
And anything with the word “revolutionary” in the title should probably be avoided.
If you just want to eat healthy, raise relatively well-adjusted kids, invest wisely, and make money in business, the current information age will not make that easy.
It’s enough to make a person do irrational things, because at some point anything can be justified…
My own practice, for instance, of eating basically the same diet now that I ate back in high school, is pretty easy to rationalize.
Eventually we’ll burn through all the healthy-eating trends, I reckon, and some new science will reveal that ice cream, pizza, and coffee with a cream-cheese bagel contain all the crucial but previously undiscovered micro-nutrients needed to prolong life.
Once you find yourself in the “age of bullshit,” where anything’s possible but everything’s probably a lie, what then?
If you ask me, it’s time to take refuge in math.
Numbers don’t lie.
At least not all by themselves, they don’t.
Last week on the podcast, Joe talked with Jared Van Orden about that most excellent and satisfying topic – numbers.
The kind that can actually increase your bottom-line profits and by extension, the valuation of your business.
Specifically, the numbers in a business’s expense column that relate to foreign currency exchange costs.
Saving on FX may not be the latest trend, or a popular hashtag on Twitter and Instagram, but from where I sit, that’s a very good thing. And whether you’re expanding a business to sell in overseas markets or purchasing from manufacturers on foreign soil it’s a crucial consideration.
Jared Van Orden joined us from GPS Capital Markets, a foreign currency exchange brokerage that offer solutions to businesses in all sorts of scenarios involving foreign currency.
In this post I’m diving into 5 of those scenarios, where understanding your exchange rate and developing a strategy around it can add major dollars to your bottom line and ultimately result in a hefty increase to the valuation of your business.
These are 5 ways to save surprisingly big bucks depending on what kind of foreign exchange costs come up in your business:
Whether you sell in the EU as an Amazon seller, or in other countries from your own ecommerce store, you’re paying a cost for converting those foreign revenues into US dollars.
And you may not realize how much higher that cost is than it could be.[
Before closing its US operations at the end of February, WorldFirst was a popular way for Amazon sellers to convert revenues at lower fees than those charged by Amazon.
What advantage did WorldFirst offer?
They offered exchanges at market rate with around 1% fees.
For those who didn’t use WorldFirst or another brokerage, what happened?
Without a brokerage handling the exchange, Amazon sends those revenues to the seller every 2 weeks at an exchange rate that’s often as high as 3% over the market rate.
That percentage difference can add up to thousands of dollars a month.
With WorldFirst out of the picture for both US and Canadian sellers, it’s become necessary for those sellers to look to other brokerages, such as GPS, that offer the same basic services.
If you sell on your own store outside the Amazon marketplace, you’re often paying those same higher conversion rates and fees to your credit card processor.
Jared refers to those extra charges as the “currency conversion buffer” and says that most platforms and banks build that buffer into their fees.
According to Jared, China is unique among the countries you might source products from because China wants US dollars from a transaction rather than their own currency.
The official currency in China is the Renminbi (RMB or CNY). The basic unit is the yuan, so you’ll often hear the terms used interchangeably.
China has historically controlled the exchange rate between dollars and yuan, devaluing the yuan in the process.
Why would a country want to weaken their own currency?
As I understand it, doing so has allowed China to boost exports, shrink trade deficits, and reduce the cost of interest payments on its own debts.
In other words, to strengthen their own economic position globally.
The result of all this, says Jared, is that when you buy from China, “It’s really hard to get any pricing outside of the US dollar.”
When you buy products in other countries, like those in the EU, you may need to convert dollars into Euros (or another currency) first.
But, Jared points out, when you use a banking platform to purchase those Euros, you’ll notice the exchange rate is different than the one you’ll see on Google.
Because the results on Google reflect the “market rate” which is the average rate at the time of transactions of $5MM or more.
If you were buying huge blocks of currency, you’d get that rate, yes.
But for smaller transactions, the banks mark up the exchange rate. Again, that currency conversion buffer comes into play.
And this again presents an opportunity to save money by using a brokerage like GPS.
How much can you save? Jared says the savings can be substantial, but that it will depend on all factors involved on a case-by-case basis, including the currency involved as well as the specific bank and the supplier you’re buying from.
The important thing to consider, is that you’re always paying for the conversion in a sense, whether you pay a manufacturer in India who’s pricing in US dollars or paying a bank ahead of time to convert the funds for you.
And if it seems like it would be a headache to figure out who’s charging less and which way to save the most, you’re right.
Which is exactly where a brokerage comes in. They do that figuring out for you, using their expertise and experience to find the strategy that adds the most to your bottom line.
As Joe points out, if you save just $3k in conversion fees and percentages over a year on say $100k revenues, that’s $9k or more added to the value of your business later.
India is another special case, Jared points out, due to what he calls “interesting tax laws.” He says that when you buy from an Indian seller or manufacturer who’s pricing you in US dollars, you’ll often see the price in rupees (INR) on the invoice.
The rupee price will often show up to a 5% conversion buffer built in to your actual price.
This means you’ll have the opportunity to save that 5% by paying in INR.
Another substantial saving on foreign exchange costs.
What if you buy rupees ahead of time to pay a supplier?
Yes. Locking in the exchange rate ahead of time can pose a risk.
If the INR, the Indian currency, strengthened after you did so, for instance, you’d lose a percentage of your profits in the end.
Making informed decisions if you have that need, about when to lock in the exchange rate and the best way to go about it, becomes important but complicated.
It’s another way an exchange brokerage can help.
In the case of buying in US dollars where you don’t actually have to exchange, is it true that the exchange rate no longer matters?
Jared says no.
It may be counter-intuitive, but you’ll see that when the Chinese currency, for instance, strengthens, rather than lose money when they receive US dollars, Chinese suppliers will often raise their prices.
When you look at the price fluctuation from a single supplier over a period of time, it often reflects that conversion rate change.
It seems that when dealing with a foreign currency, your bottom line will be affected whether you buy with US dollars or with that country’s own currency.
It’s essentially the difference between buying before the exchange and buying after the exchange. Either way, it affects your costs.
And either way an exchange brokerage can develop a savings strategy to fit your situation.
One strategy that big sellers on Amazon who sell into the EU might consider, is setting up a Euro bank account to connect to the Seller Central account.
It’s one way to avoid paying Amazon conversion fees and higher exchange rates.
Using a bank with online access, Jared says, you can manage the account from the US and convert the funds back to dollars whenever it makes sense to do so.
It’s a fine strategy that may not be as simple as it sounds.
First of all, as a US corporation, you may need to register your business in the European country where you set up the bank account, which can cause tax nexus issues there.
GPS and other brokerages offer a way around that problem.
With a special type of account called a “multi-currency account.”
While the account is assigned to you, it doesn’t require that you register in country to set it up and use it.
Not only would such an account help you get a favorable exchange rate, Jared says, but you can also use it to pay other expenses over in Europe, such as VAT taxes, without the extra conversion fees.
One more way to save on foreign exchange costs. And one more way to add to the valuation of your business.
Like I said, these are confusing times and I’m turning to math.
One way to make your foreign currency exchange math a lot simpler, is to turn to a brokerage firm who specializes in handling the matter and can strategize for you.
$6k savings from an optimum exchange rate and lower fees now, turns into $18k added to the value of your business later.
That’s simple and practical. Exactly what we could all use a lot more of lately.
Fewer revolutionary new diets. Fewer sketchy synthetic investments. More practical methods to add actual value to your business.
Are you ready to sell your online business?Let's Talk!Get a free evaluation