Foreign exchange risk mitigation for UK startups: simple policy, natural hedges, forwards

How to Protect Your Startup from Currency Fluctuations

Your UK startup has just landed its first major US or European customer. It is a landmark moment, but the resulting invoice, denominated in USD or EUR, introduces a new, unwelcome variable into your financial planning: foreign exchange (FX) risk. That predictable monthly recurring revenue you celebrated can suddenly be worth 5% less by the time it hits your GBP bank account. Sudden GBP/USD or GBP/EUR swings can wipe out thin startup margins and make revenue forecasting unreliable. For a founder focused on runway, this volatility is more than an accounting headache; it is a direct threat to stability and growth.

The good news is that managing this risk is an incremental process. While HM Treasury offers guidance on managing foreign exchange exposure, the principles can be applied without a dedicated treasury team. You can build a robust defence against currency fluctuations by implementing a clear, tiered strategy, starting today.

Level 1: Stop Losing Money on International Payments

Before exploring complex financial instruments, the first step in currency risk management for startups is to stop giving away your margin unnecessarily. When your international revenue first starts flowing, the default is often to receive it into your primary GBP current account. This is one of the most expensive ways to handle international payments for UK companies. The reality for most pre-seed startups is more pragmatic: you need to control costs at every turn.

The primary culprit is the FX spread, which is the difference between the 'real' mid-market exchange rate and the rate you are offered. This spread is a hidden fee. Mainstream bank FX spreads for SMEs can be anywhere from 1% to 3%. On a $50,000 payment, that could be a £1,200 loss just for moving money from one account to another.

This is your first line of defence. The most immediate and impactful action you can take is to open a multi-currency account with a specialist provider. Platforms like Wise, Revolut, or Airwallex offer spreads often in the 0.4% to 0.6% range. Making this one change can immediately save you thousands of pounds a year. These platforms are designed for the operational reality of a startup, integrating with accounting software like Xero and allowing you to hold balances in multiple currencies.

Holding balances in USD and EUR means you can receive a payment from a US client and keep it as USD. You are no longer forced to convert it to GBP at a poor rate on the day it arrives. This simple change gives you control, reduces costs, and provides the foundational layer for more sophisticated multi-currency accounting for startups.

Level 2: Build a Natural Hedge to Manage Exchange Rate Volatility

Once you have stopped overpaying on conversions, the next level of managing exchange rate volatility is to reduce the number of conversions you make. This is known as creating a "natural hedge". The core concept is simple: match your revenues and costs in the same currency. If you earn significant revenue in USD, find ways to spend in USD. This strategy insulates a portion of your business from currency swings and further reduces transaction fees.

Almost every UK tech startup has significant USD-denominated costs. These often include subscriptions for cloud services like AWS, CRM software like Salesforce, or marketing platforms like HubSpot. Instead of converting all your USD revenue to GBP to pay your UK team, only to convert GBP back to USD to pay these vendors, you can pay them directly from the USD balance held in your multi-currency account. This insulates your operational spending from any FX volatility.

This approach is highly effective across different industries:

• SaaS Companies: Pay for US-based software subscriptions, cloud hosting, and digital advertising on platforms like Google or Meta directly from your USD balance.
• E-commerce Businesses: If you source products from European suppliers, hold EUR revenue to pay those invoices directly. This protects your cost of goods sold from currency fluctuations.
• Deeptech and Biotech Startups: A scenario we repeatedly see is with grant-funded businesses. A UK biotech firm might secure a substantial grant from a US institution, paid in USD. Their first instinct may be to convert the entire tranche to GBP to cover UK-based payroll. However, they also face significant costs for specialised lab equipment and services from US suppliers. By holding the grant funding in their USD account, they can pay these vendors directly, protecting that portion of their R&D budget from currency swings.

Creating a natural hedge is an operational discipline. It requires you to categorise your expenses by currency and actively manage your multi-currency balances to cover them. This strategy minimises your cross-border revenue protection needs by aligning your financial operations with your global customer and supplier base.

Level 3: Use Formal FX Hedging Tools for Founders

As your business scales, there comes a point where operational tactics are not enough. When your foreign revenue stream becomes a core part of your business, you need more certainty in your financial forecasting. Formal hedging becomes a serious consideration when your international revenue grows past approximately £500,000 per year. The main trigger is when monthly FX swings are large enough to turn a profitable month into a loss, which often happens when foreign revenue exceeds 25% of your total revenue. At this stage, you move from simply reducing costs to actively locking in future rates using financial instruments.

This is where FX hedging tools for founders come into play. The two most common instruments for startups are forward contracts and FX options.

Forward Contracts

A forward contract is an agreement to buy or sell a currency at a predetermined exchange rate on a specific future date. It is a binding obligation. For example, if you are expecting a $100,000 payment from a client in 90 days, you could use a forward contract to lock in a GBP/USD rate today. You now know exactly how much sterling you will receive, regardless of how the market moves. This turns FX from a risk into a known variable for your cash flow forecast. In practice, founders use this to lock in rates for large, committed revenue, such as an annual SaaS contract prepayment or a major grant payment.

FX Options

An FX option gives you the right, but not the obligation, to buy or sell a currency at a set rate on or before a certain date. You pay a premium for this flexibility. An option is useful when future revenue is likely but not guaranteed, such as a large sales deal in the final stages of negotiation. It protects you from downside risk while allowing you to benefit from favourable rate movements, though the upfront premium adds to your costs.

What founders find actually works is focusing on forwards for predictability, not speculating with options to 'beat the market'. It is important to note that using these instruments has accounting implications under the UK's FRS 102 standard. Hedge accounting can add complexity to your bookkeeping in Xero, and this step often coincides with needing more formal financial oversight from an experienced accountant or fractional CFO.

Creating a Simple FX Policy to Systematise Your Approach

To make your currency risk management repeatable and scalable, it should be documented in a simple FX policy. This does not need to be a complex legal document; it can be a one-page internal guide that outlines your company’s approach so you are not making decisions on the fly. For a startup founder with limited time, this provides clarity and a framework for delegation as your team grows.

Your policy should be tiered, reflecting the levels of maturity we have discussed:

1. Level 1: Cost Control (Default Operation). All foreign currency receipts and payments must be processed through the company's approved specialist multi-currency account provider (e.g., Wise, Airwallex). Receiving international revenue directly into the primary GBP bank account is prohibited to avoid high bank fees.
2. Level 2: Natural Hedging (Operational Mandate). The finance function will conduct a quarterly review of foreign-denominated expenses. Wherever possible, USD costs will be paid from the company’s USD balance, and EUR costs from the EUR balance, to minimise currency conversions and insulate budgets from volatility.
3. Level 3: Formal Hedging (Trigger-Based Action). This section defines when you actively hedge. The policy should state a clear trigger. For example: "When forecast international revenue exceeds £50,000 per month for two consecutive months, the company will hedge a portion of its exposure."
4. Execution Guidelines. For revenue that meets the hedging criteria, the policy can set a standard procedure. A common approach is to hedge 50-75% of the next quarter's forecast-committed revenue using forward contracts. This provides significant predictability for your financial model while leaving some room for flexibility.

This simple, documented approach ensures consistency, reduces the mental load of managing currency volatility, and provides a clear audit trail for financial decisions.

Conclusion

Learning how to protect my startup from currency fluctuations is a journey of increasing sophistication. It starts with the simple, immediate win of switching from high-fee banks to specialist FX providers to control costs. From there, it evolves into an operational discipline of building a natural hedge by intelligently matching your multi-currency revenues and costs. Finally, as you scale and international revenue becomes a critical pillar of your business, you can adopt formal hedging tools like forward contracts to lock in predictability. By implementing a simple, tiered policy, you can systematically de-risk your international operations, protect your margins, and ensure your hard-won revenue translates into stable, predictable runway in your home currency.

Frequently Asked Questions

Q: When should a startup consider FX hedging?
A: Startups should consider formal hedging when international revenue becomes significant, typically over £500,000 per year or more than 25% of total revenue. The key trigger is when currency swings are large enough to materially impact your profitability or cash flow forecast. It is best to establish a policy before you execute your first trade.

Q: Are forward contracts too complex or expensive for a startup?
A: No, specialist FX providers have made forward contracts accessible for startups. There is typically no large upfront fee; the cost is built into the forward exchange rate offered. The main investment is the management time required to set up the facility and execute the contracts according to your policy.

Q: Can I just use my main business bank for international payments and hedging?
A: While you can, it is often significantly more expensive. High-street banks typically offer wider FX spreads (1-3%) on payments and may have less flexible platforms compared to specialist providers. For startups, these specialists generally offer better rates and technology designed for multi-currency operations.

Q: What is the main difference between a natural hedge and a forward contract?
A: A natural hedge is an operational strategy where you match revenues and costs in the same foreign currency to reduce the amount of money you need to convert. A forward contract is a financial instrument that locks in a specific exchange rate for a future transaction, eliminating uncertainty for that specific cash flow.