A forward contract lets your business fix the exchange rate on a future payment today — for up to 12 months ahead. Whether you’re paying an overseas supplier in 60 days or receiving foreign currency from an export contract, a forward contract removes the risk of the rate moving against you before settlement. For UK businesses with any regular international payment exposure, it’s the most widely used and cost-effective tool available.
What Is a Forward Contract?
A forward contract is an agreement to exchange a set amount of currency at a fixed rate on a future date. You agree the rate, the amount, and the settlement date now — and the exchange takes place at that agreed rate when the date arrives, regardless of where the market has moved.
It is not a gamble or a speculative product. The purpose is protection — knowing in advance exactly what a foreign currency payment will cost you in sterling, so you can price contracts, plan budgets, and protect margins with certainty. For a detailed explanation of the mechanics, see our full forward contract guide and our guide on currency hedging for UK small businesses.
Why Forward Contracts Matter for UK Businesses
The problem every business with international exposure faces is the gap between agreeing a commercial deal and settling it. A UK manufacturer who agrees to pay a US supplier $400,000 in 90 days has locked in a commercial commitment but not a sterling cost. If GBP/USD falls from 1.30 to 1.24 in those 90 days, the sterling cost rises by over £14,800 on the same order — with no change to the underlying deal.
A forward contract eliminates this. Book it the day the purchase order is confirmed, and your sterling cost is fixed. This is why forward contracts are standard practice for UK importers, exporters, and any business with predictable foreign currency commitments. See our guide on how exchange rates affect UK business profits and our guide to paying overseas suppliers for the full picture of where currency risk sits.
How a Business Forward Contract Works: Step by Step
- Identify your exposure — a confirmed purchase order, a signed export contract, or a known upcoming payment in a foreign currency with a fixed amount and date
- Contact your currency specialist — request a forward rate for the currency pair, amount, and settlement date
- Agree the forward rate — the rate offered will be close to the current spot rate, adjusted for the interest rate differential between the two currencies (the “forward points”)
- Place a deposit — typically 5–10% of the contract value, held as security and returned at settlement
- Settlement — on the agreed date, you pay the balance and the currency is exchanged at the locked rate and sent to your beneficiary
Real Business Examples
Importer paying an overseas supplier
A UK clothing retailer orders €180,000 of stock from an Italian manufacturer, due to pay in 90 days. GBP/EUR is currently 1.17. The retailer books a forward contract at 1.17, fixing the sterling cost at £153,846. Three months later, GBP/EUR has fallen to 1.10. Without the forward contract, the same payment would cost £163,636 — £9,790 more. See the current pound to euro forecast for the live outlook.
Exporter receiving foreign currency
A UK software firm agrees a $600,000 contract with a US client, payable in 6 months. GBP/USD is 1.28. The firm books a forward contract to sell $600,000 at 1.28, locking in £468,750. When payment arrives, GBP/USD has risen to 1.36 — which would have reduced the sterling value to £441,176 had they waited. See the current GBP to USD forecast and our guide on receiving international payments as a UK business.
Seasonal stock purchase
A UK retailer buying Christmas stock from an Asian supplier in August, with payment due in October. Rather than hope the rate holds, they book a forward contract the moment the order is confirmed. Their cost of goods is fixed in sterling from day one — enabling accurate pricing without currency risk embedded in every SKU.
Regular supplier payment programme
A UK importer paying a US supplier $80,000 per month can book 12 monthly forward contracts at once, locking in the rate for the entire year. Their annual supplier cost is fixed in sterling from January, making annual budgeting and cash flow forecasting precise regardless of GBP/USD movement. This is explored in detail in our guide on the best way to pay overseas suppliers.
What Does a Forward Contract Cost?
Forward contracts have no upfront fee. The costs are:
- Deposit: Typically 5–10% of the contract value, held as security and released at settlement. On a £100,000 contract, this is £5,000–£10,000 tied up for the duration.
- Forward points: The forward rate will differ slightly from the spot rate, based on the interest rate differential between the two currencies. For GBP/EUR and GBP/USD, this is typically very small — often under 0.3% for a 3-month contract. The BoE rate decision directly influences these forward points.
- Exchange rate margin: The specialist’s margin on the rate itself — typically 0.3–0.8% via a currency specialist versus 2–3% at a bank. Full detail in our guide on the cost of international transfers from the UK and why banks give worse exchange rates.
Forward Contract vs Spot Transfer: Which Is Right?
| Forward Contract | Spot Transfer | |
|---|---|---|
| Rate | Fixed today for future payment | Live market rate at time of transfer |
| Rate risk | None — fully eliminated | Full exposure until transfer is made |
| Best for | Known future amounts with confirmed dates | Immediate or unplanned payments |
| Deposit required | Yes (5–10%) | No |
| Upside potential | Capped — you pay the agreed rate | Full benefit if rate improves |
| Flexibility | Less — commitment to amount and date | Full — convert whenever you choose |
For most businesses with regular international payments, the right approach is a combination: forward contracts on confirmed, predictable amounts and dates; spot transfers with rate alerts for variable or unplanned payments. The best time of day to transfer money matters for spot transfers too. See our guide on currency hedging for UK small businesses for how to build this into a complete strategy.
Window Forward Contracts
A standard forward contract has a fixed settlement date. A window forward allows you to draw down against the contract at any point within a defined date range. This is particularly useful for businesses where payment timing is uncertain — for example, where goods delivery from an overseas supplier may vary by a few weeks, or where a project payment milestone could shift.
When Forward Contracts Are NOT the Right Tool
- When the payment amount is uncertain — if you don’t know how much foreign currency you’ll need, a spot transfer with rate alerts is more appropriate
- When payment terms are very short — for payments due within a few days, a spot transfer is simpler and avoids the deposit requirement
- When you want to retain upside — if you believe the rate will move in your favour, a forward contract locks you out of that gain
- When the exposure is too small — for very small payments, the deposit tied up for months may not be efficient relative to the rate risk being hedged
How to Set Up a Forward Contract for Your Business
- Open a business account with a currency specialist — this involves standard KYC: company registration, director ID, and proof of address. See what documents are needed for large international transfers.
- Confirm your exposure — the amount in foreign currency, the currency pair, and the date by which payment must arrive
- Request a forward rate — your specialist will quote the forward rate based on current market conditions and the forward points for your tenor
- Book the contract and place your deposit — the rate is then fixed. Your deposit is held in a segregated client account and returned at settlement
- Settle on the agreed date — transfer the balance, and the payment is sent to your beneficiary at the agreed rate. Track delivery with an MT103 if needed
For large or complex FX requirements — multiple currency pairs, a rolling programme of supplier payments, or forward contracts combined with overseas supplier payment management or repatriating overseas earnings — a currency specialist will work with you to structure the right approach. We work exclusively with FCA-authorised payment partners, ensuring your funds are protected throughout.
Frequently Asked Questions
What is a forward contract in business?
A forward contract fixes the exchange rate for a future foreign currency payment, for up to 12 months ahead. It eliminates the risk of the rate moving against you between agreeing a commercial deal and settling it — giving budget certainty and protecting profit margins on international transactions.
How far ahead can a business lock in an exchange rate?
Up to 12 months is standard for most UK businesses via a currency specialist. The further ahead you book, the larger the forward points adjustment to the rate — though for major pairs like GBP/EUR and GBP/USD, this remains modest. See our pound to euro forecast and GBP to USD forecast for current market rates.
Do I need a deposit for a forward contract?
Yes — typically 5–10% of the contract value, held as security in a segregated client account and returned at settlement. On a £200,000 contract, expect to set aside £10,000–£20,000 for the duration of the contract.
What happens if I no longer need the forward contract?
A forward contract is a binding obligation. If your circumstances change — for example, an order is cancelled — you may be able to close out the contract early, but you will receive or pay the difference between the contracted rate and the current market rate. Always discuss this risk with your specialist before booking if there is material uncertainty over whether the payment will proceed.
What is a window forward contract?
A window forward lets you draw down against a fixed rate at any point within a defined date range, rather than on a single fixed date. Ideal for businesses where payment timing is known but not pinned to an exact date — for example, variable delivery schedules from overseas suppliers.
Can a small business use a forward contract?
Yes. Forward contracts are available to businesses of any size through a currency specialist. They are most cost-effective for payments above £10,000–15,000. See our full guide on currency hedging for UK small businesses for how forward contracts fit into a broader FX strategy.
Forward contract vs spot transfer — which should my business use?
Use a forward contract for confirmed future payments with a known amount and date. Use a spot transfer for immediate or unplanned payments. Most businesses benefit from using both: forwards for predictable exposure, spot with rate alerts for the rest. See our business foreign exchange guide for full detail.
Cambridge Currencies sets up forward contracts for UK businesses of all sizes — from single supplier payment hedges to rolling 12-month programmes. We work exclusively with FCA-authorised payment partners, ensuring your funds are fully protected at every stage. Request a free quote or speak to a specialist to discuss your forward contract requirements today.
