Currency UK Head of Sales Ben Kohler assesses the impact of COVID-19 on foreign exchange within the CBD sector.
With CBD still being a relatively young and expanding industry, many businesses are not yet utilising traditional financial services in the way that other sectors do. This is particularly the case when looking at foreign exchange (FX) solutions and dealing with the FX market.
Foreign exchange rates are an important production cost for anyone operating internationally within the CBD industry, particularly those who are UK based and need to import hemp oil, isolate or MCT oil from Europe or the US.
Businesses can incur a significant increase in costs if the currency they are holding funds falls against the currency used by countries where they purchase their raw materials. Similarly, for those who are selling internationally, the same risks exist. If movements in the market cause the currency of the territory you are selling to rise, you will receive less base currency when making each sale. This can sometimes only be the difference of a few thousand pounds, but if it is not planned for properly a large enough shift in exchange rates at the wrong time can result in significant losses for the business, damaging cash flow.
One of the other major difficulties that the cannabis community faces is the problem of not being able to open international bank accounts in certain areas, alongside the regulation that the industry faces as a whole. Cannabis companies often face much scrutiny from a compliance perspective and are asked to provide large amounts of business documentation when setting up new bank accounts. This can make it particularly difficult when trying to implement an international banking and payments solution.
For businesses in the sector, it is therefore beneficial to use financial services organisations who have a larger international reach, this may not only be the bank, but also FX brokers. Small FX companies are often able to act in a more streamlined way than most larger banks and can act as a multi-currency account for your business, eradicating transaction charges and making international payments simpler.
A further benefit of pairing with a foreign exchange expert is their ability to act as your eyes and ears in the currency market. It’s almost impossible to fully predict behaviours in exchange rates and how they will move, but understanding what influences them can help in planning to keep your finances secure. Factors such as political events and economic data are consistent contributors to movements in the market as well as the supply and demand of different currencies at that given time. While businesses can look out for these factors and plan accordingly, as we have seen with the coronavirus pandemic, unexpected events can have a huge impact.
COVID-19 and risk management
As the pandemic began there was a sudden surge of investors moving to put their funds in what are considered to be ‘safe haven’ currencies, which led to large swings in the market. The speed of these fluctuations in exchange rates was something many FX brokers had not witnessed before, with safe haven currencies rising 10% in only two weeks. As a result, businesses based in the UK buying US dollars saw their costs increase by 10%.
Naturally, a worldwide pandemic is not something the majority of businesses had budgeted for, but those who had a risk management strategy in place had secured their foreign currency for the year. This can be done through the use of a forward contract, which essentially allows the user to lock in favourable exchange rates and pay for a year’s worth of currency in instalments, fixed at a certain exchange rate. This not only allows much more financial certainty, but also mitigates the risk of profits being damaged by fluctuations in the market: something that many businesses will have suffered from due to the COVID-19 outbreak.
Looking ahead to the rest of 2020, we are certainly not out of the woods yet from a COVID-19 perspective. This means it is now imperative to get a risk management strategy in place as soon as you can, in order to leave your business at least somewhat protected. This may be through the use of forward contracts as mentioned above, however other hedging solutions and judicious use of market orders can give CBD businesses a sense of security and control.
CBD itself is a uniquely placed industry; and due to regulation, it can be harder for cannabis companies to find an international payment provider. However, based on the risks related to foreign exchange, having an FX specialist by your side can be very beneficial – particularly one who can offer much more than a one-off cost saving and who will continually watch the market on your behalf, updating you on potential shifts and changes that could both positively or negatively impact your bottom line.
If you would like to speak to an FX specialist about putting a risk management strategy in place or to see where you may be exposed, speak to Currency//UK by calling +44 (0) 20 7738 0777.
Head of Sales
Currency UK Ltd
+44 (0) 2077380777
This article is from issue 14 of Health Europa. Click here to get your free subscription today.