Many small and medium-sized businesses use goods, equipment or materials of foreign manufactures and are dependent on imports. In earlier times, it did not create any difficulties, but because of the storm in the currency market businesspeople faced a number of problems. Exchange rate fluctuations force them to suffer losses or to raise prices, which leads to loss of customers.
To survive, businesses have to develop new financial products, which they had not previously faced with.
There are many ways to help importers better adapt to the crisis situations.
1. Foreign currency forward contracts will help to reduce currency risks
Fluctuations in the currency market is the main problem for companies whose business is based on imports. Banks offer to minimize losses by purchasing forward foreign exchange contracts: importers fixed exchange rate at the date of conclusion of the contract, and buy it on the same course later when goods are to be paid. If between the conclusion of the contract and delivery of the goods is a considerable time, the difference in rates can be very sensitive.
For example, a small company entered into an agreement with a foreign manufacturer for the supply of equipment. Product price is fixed in the foreign currency, partial payment is made at the conclusion of the contract, and partly at the date of delivery shipment. But it takes some time to produce and deliver goods. Under constant currency fluctuations it is likely that by the time of goods delivery the price in the national currency will increase. Foreign currency forward contracts allows to fix the exchange rate for a specific date.
2. A letter of credit and bank guarantee instead of prepayment
In addition to currency problems, importers faced with a crisis of confidence on the part of foreign suppliers. Because of the increased of credit risk, foreign companies are afraid of default contracts and require partners prepaid deliveries. Prepayment (often required at a rate of 100%) for many small businesses impossible: they do not have free money, as a rule, and loans have become very expensive. This problem can be solved by letters of credit, when the bank takes over the obligation to pay. Supplier can be sure that the goods will be paid, and the importer does not need to take money from circulation.
3. Factoring as a way to deal with delays
Companies that are suppliers of retail chains also require funding.
Factoring was familiar for small businesses before the crisis and was used as the way to ride out the time between delivery and payment of goods by retailers. Now it is discovered also by the companies that have not used it before. Immediately after delivery supplier may apply to the bank and get the money to fix the course of the following supplies. Especially now, when retail chains have increased further delay.
Factoring funding is granted bail receivables that arose while shipping goods to the networks. For small businesses, which often do not have the quality collateral for the loan, factoring is the only way to reduce cash shortages.
4. Another way to reduce costs from fluctuations in exchange rates for small business – is to buy the currency daily in small batches.