Foreign Currency Accounts can be very useful but can also end up being a money pit of fees and charges. So, does your business need such an account or not? This guide gives you an overview as to how to go about opening a foreign currency account and how they work and shows you some of the features and their pros and cons.
You presumably already use a UK bank account for your business in sterling and foreign currency accounts work in a similar way. You use them to pay bills or receive payments. For the most part the interest paid is negligible, just like your UK bank account.
The difference is that your account actually holds funds in another currency, like US dollars. These accounts are liable to a lot of international fees, something you should be aware of before considering one.
Where can I get a Foreign Currency Account?
The larger banks all offer them. You can go into a branch and apply but they are likely to refer you to their business banking department.
You’ll need a UK sterling account with them first so if you haven’t got one bear in mind this may take a few days to set up.
Most common currencies
Every bank will likely offer US dollars, Euros, Australian dollars and Japanese yen. In fact, the big banks will offer most major currencies.
The best benefits
These are for businesses that export overseas and receive payment from overseas in kind. If you have a bank account in a foreign currency then you can send invoices in a foreign currency. This makes dealing with customers abroad far easier. You hold foreign currency in an account you have control of.
One of the best advantages is avoiding conversion costs. If you receive US dollars in payment and can use the same account to make any payments you have that are charged in US dollars, then you are avoiding conversion fees to transfer funds back to sterling.
This is a big benefit and can save you between 1-10% of the funds value, depending on where you would convert them. It also saves you time.
You can also buy currency in advance when the exchange rate is at a favorable level and keep it in the account in case it falls.
Whilst this sounds good it is worth remembering that you are somewhat tying up your cashflow and you need to consider if your business can handle that.
The cost. Banks charge high fees on these accounts and the fees vary between the banks.
Foreign Currency Accounts conditions
Every bank offering these accounts have differing conditions, fees and features. They are worth checking out before committing. Here are some of the most common:
- Minimum balance requirements – You may require a minimum balance before you can even open an account, make sure you have enough money.
- Tiered interest – Interest rates may change depending on your balance.
- Monthly fees – These vary between banks. Some banks will not charge any fees, some banks will charge monthly fees dependent on your account balance and others will charge a flat monthly fee.
- Ability to withdraw and deposit cash – Not every bank offers this and some banks will only offer it for certain currencies.
- Access to an overdraft in a foreign currency – Again, not a service offered by every bank. Overdrafts are subject to credit approvals in much the same way as your normal business account.
- Multi currency accounts – Some banks offer accounts which let you hold multiple currencies in the same account. Sounds like an ideal solution, but be aware of the fees and conversion costs when you change one currency to another.
Fees & Charges
The usual charge you’ll find is the monthly fee, but this may not be the most significant. You may be charged when you receive currency into the account and then again when you transfer it out. If you have a lot of transactions going in and out in the currency then these charges may soon add up.
When initially buying currency to put into your foreign currency account, make sure you compare the exchange rates you are offered. This can make a huge difference in your final amount.
When to use a Foreign Currency Account and why
It’s worth looking at a foreign currency account, especially if your business is just starting to send or receive money overseas in a foreign currency. Remember they may not necessarily be cost effective what with the fees associated with them. There isn’t a threshold when they become useful, but if you receive more than £300,000 in foreign currency then they may be worth considering.
Foreign Currency Accounts come into their own when you get paid in a foreign currency AND you also have to pay suppliers in that currency. If this is how your company works then it is just the fees associated with the accounts that you need to keep an eye on. Bear in mind these can be a monthly fee or apply when you receive and send the currency.
Exporters and billing in a foreign currency
Ultimately you need to weigh up the total cost of running the account to see if the benefits are worth it. If you invoice less than £300,000 a year in that currency or if your payment is a one off then it might be worth considering other options.
- Send invoices in a foreign currency but ask customers to pay directly into your UK bank account. Remember some banks will charge for this and their exchange rates will not be good.
- Invoice in the foreign currency and use a money transfer company like OFX or HiFX to convert the currency. This is cheaper than using your UK bank account and easier than opening a Foreign Currency Account.
- Invoice your customers in sterling. This is easy for you but bear in mind it could put customers off. It exposes them to the rate risk of currency exchange.
Importers or buying overseas goods
If you have to make purchases abroad and also have customers paying in the same currency then a Foreign Currency Account could prove useful. If you don’t have the currency coming into the account you can just buy the currency and fill the account when the exchange rate is favorable. You can then hold the funds in the account until payments are due. You are effectively locking down the exchange rate, but there are drawbacks.
Buying currency and storing it in an account in another currency ties up your cashflow. You will accrue very little interest on the account balance unless you convert it back. Also if you have got your sums wrong on the favorable exchange rate then you could lose out.
There are ways to protect your business from exchange rate movements. Talk to a currency expert or foreign exchange specialist.
Geoffrey owns a company which sells high end, leather mobile phone cases and wallets. He sells his products in both the US and the UK. His products are not exported, instead he pays suppliers in each of the countries and supplies the customers according to where they are based.
For this reason he needs to pay US suppliers in US dollars and also invoice in that currency for his US customers.
He sees the business manager at the bank where he holds his UK bank account and sets up an account in US dollars. His cash flow is not affected as his business in each country effectively runs separately from one another.
He bears in mind the monthly fees when considering if his US business is profitable.