Most businesses deal with foreign currency exchange to some extent. It could be as simple as travel to foreign countries for conferences or as significant as paying millions of dollars to overseas suppliers. If you are not intentional about minimizing the cost of exchanging foreign currency, you are probably paying 2-5% more than necessary on every transaction.
If you spend $5000 on a foreign conference, that’s $100-250 more out of your pocket than necessary. That may not sound like a lot, and maybe it’s not a big deal if your only foreign experience is once a year. But these extra costs add up quickly.
If you pay a million dollars to a foreign supplier, you’re paying $20,000-$50,000 more than you need to. That’s significant.
First, some terminology
For me to write concisely about foreign exchange, we need to understand some terminology. I’m not a foreign exchange expert, so my explanations might sound elementary to an exchange trader, but it works for the purposes of this post.
The actual exchange rate between two currencies is not an exact science. The published exchange rate between two currencies can be called the spot rate. However, when you actually exchange currencies, you never pay exactly the spot rate.
Those who trade currencies, such as banks, make money on a spread, which is the difference between what they are willing to buy the currency for and what they sell it for. The larger the spread, the more the trader makes (buy low, sell high).
For example, if a spot rate between Canadian dollars (CAD) and US dollars (USD) is 0.80 USD/CAD, is a bank might be willing to buy a $1 CAD for 75 cents USD and sell it for 85 cents. Their spread is 10 cents.
If you exchange foreign currency, you want the rate you exchange at to be as close as possible to the spot rate. As a benchmark to keep in mind while reading this post, you should never exchange foreign currency for more than about 0.5% from the spot rate (unless it’s such a small amount the convenience outweighs the cost).
For example, if you are buying CAD with USD and the spot rate is $0.800, you should not pay more than $0.804 USD for the $1 CAD. If the amount exchanged is in the thousands of dollars or more, you could pay as little as 0.1-0.2%.
With the technicalities out of the way, here are some tips for saving money on foreign exchange. These actions aren’t reserved for big businesses. Even the smallest of businesses can easily take these steps.
NEVER let your bank exchange foreign currency (at least at their published rate)
Okay, “never" might be too a strong a word. If you need $100 worth of foreign currency, $2-5 may be worth the convenience of a local bank.
As I write this, Wells Fargo’s online rates say they will sell you $1 CAD for $0.7703 USD. The spot rate is $0.7337. This means their rate is 5% more than the spot rate (remember the benchmark is 0.5%, 1/10 of what they are charging). If you buy $10,000 CAD with USD at this rate, you are spending at least $450 more than you should be.
Like any good business, most banks are willing to negotiate their rates, especially for large amounts. Their published rate is just a starting point and what they will charge if you don’t ask.
Every bank is different, but they should be willing to go down to 2-2.5% above spot for small transactions or under 1% for large transactions.
Banks may be okay if you exchange foreign currency infrequently and in small amounts, but to avoid banks, let’s move on the next tip.
Get an account with a foreign exchange service
Many foreign exchange services offer rates at a fraction of the price of banks. This is where I get the benchmark of a maximum of 0.5% above the spot rate.
There are many services out there, but I am most familiar with GPS Capital Markets in the US and Western Union and Citizens Bank in Canada. Some banks have in-house foreign exchange services that provide better rates than their retail branches, but I’m not very familiar with those options.
Here is the actual exchange rate schedule for a foreign exchange service I recently set up for one of the businesses I work with.
$0 -$5,000 0.50%
$50,000 + 0.15%
They have no minimum transaction amount or minimum volume over time. It was easier to set up than a bank account.
Unless you have a physical location near you, these services doesn’t work if you need a small amount of foreign cash for a trip. But they work great for paying foreign suppliers, receiving funds from foreign customers, or moving money between your own banks accounts in different currencies.
The process varies, but in general you deposit or wire funds to their account in one currency, and they wire or deposit the funds to their final destination in the foreign currency.
I work with a company that has locations in Canada and the US. Most of the revenue comes in Canada and most of the expenses are in the US. The foreign exchange service I use has an account at the same bank we use in Canada.
Any time I need to move funds from Canada to the US, I fax a request to the bank to transfer Canadian funds from our account to exchange service account, the service exchanges the CAD to USD at a great rate, and they wire the USD to our US bank account. It takes me about 30 seconds to send the fax and notify the exchange service, and a few hours later the funds appear in the US account.
That’s enough foreign exchange fun for now. I’ll save more tips for my next post.
As you can see, even the smallest businesses can save a lot of money on foreign exchange by taking some simple steps.
Question: How do you save your business on foreign exchange?