How to Manage Foreign Exchange Risk When Raising Money Overseas

Closing a funding round can be a pivotal moment for small businesses. Finally equipped with the cash they need to grow, business leaders can put their plans into action — whether they’re hiring new team members, investing in research and development, or purchasing inventory overseas.

The rapid globalisation of Venture Capital (VC) means investors have greater access to exciting founders and innovations worldwide and businesses have more access to investment opportunities. While funding was once reserved for startups in and around Silicon Valley, VCs in the United States (US) poured an astounding £238 billion into companies overseas in 2023¹. Simultaneously, fast-growing VC industries in China, the United Kingdom (UK), India, and France have established themselves as key players — investing billions into startups at home and abroad.

These global investors are finally levelling the playing field for businesses based outside major US VC hubs. However, uncertain economic markets, rapidly fluctuating exchange rates, and complex legacy banking solutions mean businesses that raise money overseas are exposed to significant foreign exchange (FX) risk. These vulnerabilities could have a major impact on their funding runway and negatively impact their ability to invest in growing their business.

In this blog, we’ll explore what FX risk is and how you can best manage your business’s fundraise to preserve capital at home and abroad.

What is FX risk?

FX risk — also known as currency exchange risk or exchange rate risk — is the potential loss of money due to currency exchange rate fluctuations in international financial transactions. While individual exchange rates fluctuate over the course of a day, when high value transactions are involved, the potential losses are significant. Without proper preparation, businesses that raise money overseas can leave a large portion of their fundraise vulnerable to unforeseen losses.

Having a fundamental understanding of the markets you’re operating in and the currencies you’re set to receive funding in can help you better manage and avoid risk. But as a business owner, you don’t have the time to continuously monitor exchange rates — especially if you operate in multiple currencies.

Plus, currency valuations change quickly. The Japanese yen (JPY), for example, has lost more than a third of its value over the past three years — falling from 0.0066 British pounds (GBP) per JPY in September 2021 to just 0.0054 GBP per JPY in September 2024².

This devaluation means that if a business in the UK raised 100,000,000 JPY three years ago, they’d expect to receive around 660,000 GBP once converted to their home currency. Today, the same conversion would result in just 540,000 GBP — a considerable loss of 120,000 GBP.

Even without significant currency instability, businesses are constantly exposed to FX risk. Whether you’re receiving funds from your investor’s international bank account to your local business account or converting your fundraising capital in portions over time to pay suppliers, business partners or staff in different currencies.

Compounding this risk, banking solutions built on legacy systems often make significant markups on the exchange rate, as well as charging high transfer fees — meaning you’ll eat into your funds every time you move capital between currencies.

Over time, exposure to FX risk will reduce your working capital and leave you with less money to reinvest into your business.

So what can you do to protect your business’s fundraise from FX risk?

Raise money like a local

The first step to reducing FX risk is opening a multi-currency business account in your investor’s home currency before receiving the funds. This account should allow you to create local details in your investor’s currency so you can receive your investment like a local business. In other words, you'll receive the full investment amount directly to your business account — without being charged unnecessary exchange rate markups or hidden fees.

At Wise, our Business account lets you create local account details in 8+ currencies, including Australian dollars (AUD), British pounds (GBP), and Euros (EUR). The process of opening an account is fast and hassle-free, so you won't have to worry about making multiple visits to a local branch or signing piles of paperwork to get started. Simply sign up and share your account details with your investor to start receiving payments to a UK account number and sort code, Euro IBAN, and more.

This process protects your funding from transaction fees and means you’ll receive your capital for free — diminishing FX risk from the get go.

Manage multiple currencies

If you’re operating a global business, you’ll likely have to pay employees, suppliers, and/or contractors in currencies other than your own. With each overseas transaction, however, you’re exposing your business to additional FX risk.

In addition to enabling you to receive funding like a local, a multi-currency business account will make it easy to make, manage, and receive payments in a range of currencies — all while protecting your cash flow from inflated transfer fees and currency fluctuations.

This means that if the same UK business that raised money in Japan needs to pay remote employees in Spain, they can convert a lump sum of their JPY funding to EUR and process the transactions through a batch payments tool — only paying for the exchange once, rather than risking FX fluctuations on individual transactions. Similarly, when a customer in Germany wants to pay the UK business for their services in Euros, they’ll be ready to receive the money with their Euro IBAN — no strings attached.

The Wise Business account saves you even more money by never charging hidden fees and always converting money at the mid-market exchange rate. That way, you can extend your funding runway as far as possible. Whether you only need to convert your money once or will need to make and receive regular payments in different currencies, our business account is designed to reduce cash flow risk and give you competitive rates every time.

Make the exchange rate work for you

As a business leader, the time following your fundraise can be both extremely overwhelming and incredibly exciting. While you're busy with plans for how you'll invest the funding, managing FX risk might not be top of mind. You need a solution that can help mitigate risk by converting your money when the exchange rate is most favourable.

At Wise Business, we’ve developed tools designed specifically to take care of your funds, so you can make the exchange rate work for you. Our Rate Alert feature notifies you with live information so you can stay ahead of currency fluctuations. In practice, that means the UK business we discussed above could set an alert to be notified when the exchange rate rises from 1 JPY = 0.0054 GBP to 1 JPY = 0.0058 GBP.

To make the conversion process even more efficient, you can set up Auto-Conversions and automatically convert your money between two currencies once they reach your desired exchange rate. Simply choose the currencies you want to convert between, set the desired exchange rate at which you’d like to convert, pick the amount of money to exchange, and get back to scaling your business.

While it’s impossible to completely avoid FX risk after you’ve raised money overseas, opening a multi-currency business account can ensure you don’t leave money on the table. Whether you’re just beginning the fundraising process or are already spending your investment, open a Wise Business account to lessen your risk and improve savings.

Open a Wise Business account

Sources:
1 The State of Global VC. (n.d.). Dealroom
2 Yerushalmy, J. (2024, April 30). Why has the yen fallen to a decade's low and what does it mean for Japan's economy? The Guardian.