How to control FX risk as you scale your startup

International expansion, trade and investment are now an inevitable part of doing business for any ambitious startup. But with any international transaction comes the impact of the foreign exchange rate.

The changing value of currency can impact everything from paying teams, to setting prices, to how much your investment is actually worth. So understanding how to control foreign exchange (FX) risk for your business is a vital piece of the growth puzzle.

What is FX risk and what are the causes?

Foreign exchange risk is the possibility that fluctuations in the exchange rate could impact your profits by changing the real value of your money in relation to other currencies. Whether it’s international sales or paying suppliers and remote teams, any transaction in another currency can leave you open to FX risk.

Exchange rates in the UK are influenced by a wide range of factors, including interest rates set by the Bank of England, the strength of the pound, and political and economic instability either in the UK or in the country of the currency you’re trading with. Fluctuations in major currencies like the USD or EUR can also affect exchange rates worldwide.

Predicting markets is not straightforward, and certainly not something a business can control, which is why companies operating in other currencies or receiving funds from international investors need to have a strategy for navigating currency volatility.

Having volatility in revenue streams or costs will bring uncertainty to your startup at a time when you need to be focusing on stable growth. As a result, finding a solution that solves these issues for you early on is vitally important.

Cash flow issues

One of the biggest risks of FX volatility is its effect on your business’s cash flow. A changing exchange rate can materially alter the value of your international payments, meaning you could suddenly earn less from your international exports or have to pay more for overseas goods or services. This makes it very hard for startups to forecast accurately and have a predictable supply chain.

As a result, FX volatility can also impact your international expansion plans.

If you enter a new market based on projections and profitability forecasts, an unfavorable exchange rate could undermine those expectations.

FX fluctuations blocking investment

A business vulnerable to changing FX rates might also find it harder to attract investors. A startup that has uncertainty around their incoming revenues or outgoing costs or cannot guarantee consistent margin is a risky option for investment.

If you are receiving investment from overseas, FX changes could also impact the amount of funding you receive, meaning the funds you worked so hard to raise are worth less than you initially thought.

Competitive advantage

Another aspect to consider is how the FX rate could favourably impact your competition. A business competing for the same customers and operating in stronger, more stable currency may be able to offer lower prices and achieve higher margins, meaning FX fluctuations could impact your ability to compete with your rivals.

The good news is, all of these risks can be mitigated.

How Wise Business can help

With a Wise Business account you can hold and manage money in more than 40 currencies. Features like autoconversion also mean you can exchange currencies at your desired rate automatically, eliminating the need to monitor FX markets for the best conversion timing. This means you can make the exchange rate work for you; hold your funds until the rate is favourable or set auto-conversions and let us do it for you.

This is also great for receiving international investment, as you can receive money in your investor’s currency without losing value due to the exchange rate.

When you do need to exchange currencies, Wise Business offers conversions at the mid-market rate with no hidden fees or markups. This transparency means you can set prices, and plan expansions into new markets, safe in the knowledge that you are not going to be stung by fluctuating FX rates at a later date.

For startups, understanding currency fluctuations is crucial when raising investment, setting prices, or choosing new markets. A favorable exchange rate can open doors to expansion, while volatility can impact profits and create unexpected challenges. As you move to the next stage of growth, factoring FX volatility into your strategy will help you make informed decisions, attract the right investors, and position your business for success.