Receiving earnings in a foreign currency – Top tips for the self-employed
As more and more businesses expand internationally and technology is making the world a smaller place, working for businesses in foreign countries is becoming much more common.
There are of course risks associated with expanding your work to overseas customers, not only are there currency/exchange rate elements that need to be considered but it can take longer for money to arrive in your account than it does with your UK clients and it can be much more difficult to chase slow or unreceived payments. It is crucial then that any element of this process that can be made simpler and stress-free is optimised, particularly if it can save you money.
Working with businesses in other countries opens up many more opportunities for ways for you to earn money, but when dealing with transferring money overseas and exchanging currency, there are things to consider to ensure you keep as much of your hard-earned money as you can. One of these things is how you will get any money earned from overseas customers to your account while incurring as few costs as possible.
Contractors and freelancers who are receiving payments would, of course, prefer to be paid in their home currency however this often isn’t the case. This requires the individual to then exchange their pay into their home currency, seeing them incur charges and ultimately earn less. There are different methods you can use to transfer your foreign income in your home currency, each with its benefits and disadvantages.
An option you might consider is to set up a bank account in your customer’s currency, particularly if you have multiple customers in one place who all use one currency. That could be multiple US-based clients or different clients across countries in Europe using the Euro. This would allow them to pay you in their currency but then creates further difficulties for you.
A problem with this is that it may be costly to set up and then you are still left with the problem of having to transfer from your foreign currency account to your home currency account. Again, meaning extra costs will be incurred on your end. Having a foreign currency account will also make your accounting process and working out your UK tax more complex.
One benefit is that although it will increase complications from your side, you are likely to find it easier to attract overseas clients if they are able to pay you in their home currency rather than them having to manage the foreign exchange element themselves.
Michael, An IT Consultant in the UK signs a six-month contract with a company based in New York to build them a new piece for software to help their customers. The company agrees to pay the IT Consultant $150,000 for the work split into six equal payments, meaning he will receive $25,000 per month for the next six months. Living in the UK however, Michael needs to transfer all of this into Pounds.
In month one, Michael’s salary earned him around £19,450 as the GBPUSD exchange rate was 1.2850. In month two the exchange rate was very similar at the 1.2845 mark, meaning Michael got £19,460 for his work. The amount received in both months was what Michael expected and was the rate he based his original pricing on.
In month three, however, the GBPUSD exchange rate rose significantly to 1.3350. As a result, when Michael received his $25,000 at the end of the month, it was equivalent to £18,720, £730 less than the previous months. This may not seem like a huge amount in comparison to the worth of the whole contract. However, large swings in the FX market are always a possibility, meaning that Michael will have no certainty of how much he will earn when the money is transferred back to pounds unless he secures the rate. Michael could have done this through the use of a forward contract when he signed the agreement to complete this work. This would mean he would have had an exchange rate of 1.2850 secured for the six-month duration of the project, giving him certainty over what he would earn and giving himself a better rate.
It is important to understand that as soon as your business adds an international element to it your profits can be influenced by factors outside of your control, leaving you vulnerable. Problems occur when this isn’t planned properly and people are left short after they have transferred their money. Our advice is to make sure that you have an exchange rate plan in place so that you are not caught out by sudden fluctuations in the market.
Hedging through the use of a forward contract should be viewed as a way of eliminating that vulnerability rather than as a way of making some extra money by playing the FX market.
To find out more about saving money and minimising risk when receiving your salary in a foreign currency click here. Alternatively, you can speak to a member of our team by calling +44 (0) 20 7738 0777.