International business transfers: Timing your transfer
When is the best time for your business to transfer money overseas? Read on to find out.
When you run your own business, every single dollar counts. Finding every way you can to save money and to get a better deal can make a big difference in the long run.
So if you need to send a business international money transfer, it’s crucial that you can find the best exchange rate for your transaction. To do that, you need to understand the factors that affect international exchange rates so that you can lodge your transfer at just the right time to take advantage of a high rate.
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When is the best time for my business to transfer money overseas?
The best time for your business to send an international money transfer is simply when the value of the Australian Dollar (AUD) is at its highest. For example, if you’re changing money from Australian dollars to US dollars and the current exchange rate is AUD$1 = US$0.74, waiting for the rate to rise to AUD$1 = US$0.76 will mean you get much better value for your money.
Of course, if you want to transfer money back to Australia from a foreign country, the flipside applies. By waiting for the value of the Australian dollar to reach its lowest point, you will get the best deal on your transfer to Australia.
Why is it important to get the best exchange rate?
Because it can save you a whole lot of money. The higher the value of the Australian dollar relative to the local currency in the country you’re sending money to, the more money you will save.
Even a slight variation in the exchange rate can make a big difference to the total cost of your transfer, especially if you’re sending large amounts of money.
As an example, let’s assume you need to send AUD$50,000 to the UK. The table below shows the cost of the transaction if you were to send your international money transfer when the exchange rate was at 3 different levels:
All of these exchange rates were available at different times throughout the 2016/17 financial year. While a maximum variation of GBP£0.05 might not sound like much on paper, it can make a difference of thousands of pounds to the total cost of your transaction.
As the table below shows, by sending AUD$50,000 overseas when AUD$1 is worth GBP£0.62 instead of GBP£0.57, you can send an extra GBP£2,500.
|Transfer A||Transfer B||Transfer C|
|Exchange rate||AUD$1 = GBP£0.57||AUD$1 = GBP£0.60||AUD$1 = GBP£0.62|
|Extra money sent (compared to Transfer A)||-||GBP£1,500||GBP£2,500|
What factors influence exchange rates?
Take a look back at the history of the value of the Australian dollar relative to other currencies and it’s easy to see that exchange rates fluctuate all the time. Changes don’t occur just from month to month or week to week. Rates can experience significant upwards and downwards movements on any given day.
The list of factors that can influence the exchange rate between any 2 currencies is extensive. We’ve included some of the main factors that can drive rates up or down in the list below, but it’s worth remembering that exchange rates reflect the value of 2 separate currencies, so events and developments in both of those countries can have an impact on the value of their respective national currencies.
Factors that impact exchange rates include the following
- Interest rates. When a country’s interest rate rises, so does the value of its currency. This is due to the fact that higher rates allow lenders to attract more capital from foreign investors, thereby boosting the value of the local currency.
- Imports and exports. Another factor to look at is a country’s balance of trade. If a country is spending more importing goods than it is making from exports, the value of its currency will be lower. But if exports outweigh imports, the value will tend to rise. As an example, the strength of Australia’s economy is closely linked to the performance of the resources sector, so an overseas demand for Australian resources can force the value of the Australian dollar up.
- Inflation. A country with a low rate of inflation will usually see the value of its currency increase, while a country with high inflation can typically expect the value of its currency to fall.
- Political developments. Political instability can cause economic volatility and lead to a drop in the value of a currency. The election of a new government which plans to introduce different economic policies to those of its predecessor can also have an effect.
- Interbank exchange rates. The Reserve Bank of Australia’s website lists the current interbank or wholesale rates, which represent the midpoint between the buying and selling points for currency pairs. While this is the rate at which banks buy and sell currency from one another and not something you’ll be able to get for a business transfer, it’s a good reflection of the current value of global currencies.
- Global economic factors. It’s not just local events that can affect exchange rates. Global financial and political developments are capable of affecting economies around the world. For example, the Global Financial Crisis of 2008 had a massive impact on financial markets around the globe, causing the value of some currencies to plummet and the value of others to rise. Other events that have a global impact can also push exchange rates up or down, with a recent example being the effect of the Greek debt crisis on the economies of other countries in the Eurozone throughout 2015.
Example: Bill transfers money to the United States
Bill is an Australian business owner who wants to buy US$20,000 worth of equipment from a company based in the United States. As the equipment is not needed urgently, Bill decides to bide his time and wait for the most attractive AUD/USD exchange rate to become available.
The chart below shows the performance of the AUD/USD rate in the year leading up to 16 May 2017.
*Screenshot taken from xe.com, 16 May 2017
As you can see, the best time for Bill to send his transfer was in November 2016, when the exchange rate was AUD$1 = US$0.775. Other reasonable times to send were in October 2016 and March 2017, when AUD$1 = US$0.772.
This is a far cry from the exchange rate in December 2016 when the value of AUD$1 dropped to US$0.716. The table below shows the amount of money Bill could have saved by sending the money when the AUD/USD exchange rate was at its highest as opposed to sending the transfer when the rate was at its lowest.
By sending the money in November when the exchange rate peaked, Bill could have saved a massive AUD$2,126.51 and still have sent the same amount of US dollars to buy the equipment.
|November 2016||December 2016|
|Exchange rate||AUD$1 = US$0.775||AUD$1 = US$0.716|
|AUD needed to send USD$20,000||AUD$25,806.45||AUD$27,932.96|
* This is a fictional, but realistic, example.
Other factors to consider when choosing a transfer provider
The exchange rate isn’t the only thing you need to consider when sending money overseas. Keep the following factors in mind when comparing money transfer providers:
- Transfer fees. Transfer fees vary substantially between providers and can make a big difference to whether you get value for your money, so it’s worth shopping around to compare the fees of different providers. Remember also that some companies will waive their transfer fees on large transactions.
- Supported currencies. Make sure any transfer provider you select offers support for all the currencies in which you want to send money overseas.
- Transfer options. Some providers offer a range of transfer options to help you save time and money on international business transfers.
- Recurring payments. You can set up a regular payment on a weekly, fortnightly or monthly basis to ensure that you always pay your suppliers on time.
- Forward contracts. You can lock in an attractive exchange rate now for an international transfer that will take place months or even years in the future.
- Limit orders. This feature allows you to specify the exchange rate you want for a particular transfer, and your money is then automatically sent whenever that rate becomes available.
- Transfer time. How long will it take for the money you send to arrive in your recipient’s bank account? If an express transfer option is available, how much extra does it cost?
- Customer support. If you ever have a problem with a transfer and need help, how quickly will you be able to access customer support? Are phone, email and live online chat options available? Is there an online help centre?
- Information and guidance. While the banks will merely quote you their latest exchange rate and perform a transfer for you, specialist money transfer providers can provide advice and information on the ins and outs of global exchange rates. Compare the educational tools and resources on offer from each provider to help you get better value for money when sending funds overseas.
A final piece of advice for any business that regularly sends money overseas is to consider opening a foreign currency account. This allows you to hold money in another currency and then convert it into Australian dollars when a favourable exchange rate becomes available.
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