An interview with Ben Kohler from Currency//UK
The global cannabis industry has been proliferated by fast-growth, small-to-medium sized businesses. When it comes to the financial side of things, what are some of the core challenges that industry players may encounter (that differ to companies operating outside of our industry)?
With regards to the financial aspect, the difficulty is the regulation around the cannabis community. Difficulty opening international bank accounts is becoming a problem in many different territories and is one of the challenges facing this specific industry.
In a wider context, commercial banks don’t deal with currency and international money transfers in a way that benefits their customers. Banks tend to take a commission plus additional hidden fees when dealing with anything to do with currency and this is something that CBD and cannabis companies definitely need to take note of.
Furthermore, if not accounted for, large fluctuations in exchange rates can cause significant losses for businesses by increasing the cost of goods and materials, thus damaging cash flow.
We’re currently in the middle of a global pandemic which will have far reaching impacts on economies and the valuation of their currencies. Over the last 3 months, what have been the most significant fluctuations that you’ve seen and how quickly have these changed?
As soon as we started entering a stage of global pandemic, we saw the market flock to safe haven currencies. Large scale global investors, large businesses and HNW individuals all pretty much at the same time were selling out of commodity currencies into safe haven currencies. This led to a large swing in the sense that safe haven currencies became a lot stronger compared to all of the commodity currencies and this is why we saw such a huge change in the valuation of one currency to another. The speed of change was something that had never been seen before to the extent that we saw a 10% rise in safe haven currencies compared to those domestic ones in a 2 week period. For example, a company in the UK that was buying their goods abroad in Dollars – their costs were increased by 10% in the space of two weeks.
COVID-19 aside, there are many reasons why currencies can – and do – fluctuate. How significant can the business impact of this be?
There are many reasons why currencies fluctuate, for example economic data and interest rate changes to name but a few. Currencies are based on supply and demand so when this changes, there will be fluctuation.
The business impact can be significant because cost can go up significantly should it be the case that a currency falls. Similarly if you are selling goods and services internationally and that exchange rate strengthens in the territory you are selling in, you would receive less of your base currency for the same amount of the currency you were selling in.
Naturally, it is challenging to predict when sudden fluctuations will occur, which can leave business at risk. This currency risk can be mitigated with mitigating tools and a specific strategy aligned to a business’s goals.
The main method of managing FX risk is to lock in favourable exchange rates, through the use of forward contracts. This tool allows a business to buy up to a year’s worth of currency in advance and pay for it in flexible instalments, knowing that their profits and cash flow are locked in and secure.
There are other techniques, such as using market orders that also give more control back to businesses when dealing with foreign exchange.
It’s been well documented that for some cannabis companies, sending and receiving funds internationally has proved tricky (perhaps most notably for some organisations based in the United States). Why is this, and how can business leaders overcome such challenges, in a compliant way?
The difficulty comes back to the banking system because cannabis companies often have to provide a large amount of documentation in terms of compliance. It can therefore be more challenging for them to move money internationally. This occurs in the States more notably than anywhere else as the interstate regulations also add to this.
To overcome this, it’s important that cannabis companies use organisations that have a global reach when it comes to financial services and this won’t necessarily be their bank. For example, smaller FX brokers have a much more streamlined process when dealing with these challenges compared to banks.
For companies looking to expand internationally, what advice would you give them? What should they be looking out for, and how should they prepare their financial infrastructure ahead of said expansion of their business operations?
First of all they will, of course, require a domestic bank account. When a company expands internationally, the difficulty could be creating international bank accounts. Therefore, using a currency broker is beneficial as you can have multiple accounts round the world but only need that one main domestic account.
Furthermore, there will be a lot of different currencies moving around the business when a company expands internationally (unless it’s within the eurozone). This can lead to challenges in terms of receiving payments, inter-company payments and the risk of one currency falling hugely against another thus affecting a company’s profit margin.
If you are planning to move into the international market it is extremely important to have a risk management strategy in place, to protect your bottom line. It is also worth considering having an FX specialist in place when expanding internationally to act as someone to guide you through the process and act as your eyes and ears in the currency market and keep your profit margins safe.
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