How can it help me?
A foreign currency loan can help you manage exchange risk for your export contracts that are in a foreign currency. It can also be a useful way to manage the ongoing finances for your overseas operations.
What is it?
A foreign currency loan is a bank loan, usually in the same currency as your export contract, which can provide working capital to help you fulfil an export order before you receive payment.
How does it work?
When you negotiate an export sale in a foreign currency, you may choose to request a loan from your bank in the same currency to finance the export contract. As your debt is in the same currency as the payment to be received, you are not exposed to movements in the rate of exchange to Australian dollars between when you enter an export contract and receive payment.
Depending where the goods or services are produced, you might use the foreign currency loan funds to pay suppliers and wages in another country, or convert the borrowed funds to Australian dollars at the market rate of exchange to cover your working capital costs in Australia. When you receive the foreign currency payment from your buyer, you can use it to repay the loan.
A foreign currency loan is typically used to finance an individual export transaction. However, you might also use the loan when managing the ongoing finances of an overseas operation. If the loan is drawn in a widely accepted currency (such as US dollars), you may be able to settle transactions with sellers and suppliers from various countries using that currency, rather than dealing with several different currencies.
The interest rate on your loan may be fixed or variable. If the interest rate is fixed, your bank will charge a risk premium to cover its exposure to market rate movements.
An alternative form of credit to a foreign currency loan is an overdraft on a foreign currency account.
What are the pros and cons?
| Pros |
Cons |
| Can allow you to manage your exposure to exchange rate movements between when you commit to a sale price for exports in a foreign currency and when you receive payments in that currency |
If your buyer doesn’t pay, or the payments from your export contract aren’t sufficient to repay the foreign currency loan, you’ll need to obtain foreign currency to repay the balance of the loan. This will expose you to exchange rate movements between the foreign currency and Australian dollars |
| You can crystallise the Australian dollar amount you receive for your export order at any time by converting the proceeds of your foreign currency loan into Australian dollars |
If you repay the loan from Australian dollar earnings rather than from export contract payments in the same foreign currency as the loan, you’ll be exposed to exchange rate movement between the foreign currency and Australian dollars |
| You may benefit if the interest rate that applies to the foreign currency of your loan is lower than that for an Australian dollar loan |
Your bank may require security in order to provide the loan |
| If the loan is in a widely accepted currency, it may allow you to run your accounts for your overseas operation in that currency |
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What costs are involved?
In addition to paying interest on the loan, you may have to pay a one-off loan establishment fee and a periodic loan service fee.
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