For many years, the U.S. dollar (USD)‡ has been the world’s dominant currency. This has led many U.S. businesses to assume that all foreign trade partners prefer to do business in USD, and that this payment method is easiest because the foreign exchange process is time consuming and complex. Yet, advances in technology make payments in local currencies just as easy as paying in USD. Furthermore, using local currency can provide multiple benefits when engaging in, or advising clients on, international trade, business or realty.
Why is it better to pay in local currency?
Paying international suppliers in their local currency can give businesses greater control over costs, reduce uncertainty and strengthen commercial relationships. While paying in U.S. dollars may seem like the simplest option, it can shift currency-conversion costs and exchange-rate risk to the buyer—often without a clear view of the total cost.
When businesses pay in local currency, they can work with their financial institution to manage the foreign exchange process, evaluate pricing more transparently and determine whether hedging makes sense for a particular transaction. Suppliers may also be more willing to offer discounts or favorable payment terms when they no longer need to account for the risks and costs of converting U.S. dollars.
The result can be a more predictable, efficient payment process that benefits both the buyer and the supplier.
1. Gain greater control over exchange rates
Leveraging an existing relationship with a local bank can help businesses and clients receive preferential rates, which puts them in control of the conversion process. By dealing in local currencies, instead of sending in USD, unfavorable “surprise” exchange rates often offered by foreign banks can be avoided. In addition, by pricing in local currency terms, the decision whether or not to actively manage exchange rate risk can be made internally.
Some companies may choose to hedge specific transactions while others will take a more generic approach. An example of the latter would be to lock in exchange rates for a percentage of anticipated transactions on a quarterly basis.
2.Unlock potential supplier discounts
Importers who pay for goods in the local currency may benefit from suppliers who offer a lower price on the goods purchased. When importers remove the exchange rate risks associated with converting USD to the local currency, suppliers are more likely to offer customers a 1% to 5% discount on the transaction. For example, a discount of only 1% can save an importer $10,000 for every $1 million paid to suppliers.
3. Strengthen international business relationships
While often overlooked because it’s difficult to quantify, brand loyalty — and the repeat purchases associated with it — can be earned by saving foreign trade partners the hassle and risks associated with currency conversion. This benefit is particularly important for exporters whose products are commoditized. In this scenario, the pre-determined exchange rate allows international buyers to know the exact cost of what they’re purchasing and the profit margin to be made on each sale, time and time again. It eliminates surprise costs which can be a leading cause of failed business relationships.
When importers take ownership of the exchange rate process, foreign suppliers will sometimes extend the payment period for the goods purchased. This prolonged timeframe gives importers more time to recoup investments and conserve cash before paying the supplier.
In a highly competitive environment, importers and exporters should not overlook the positivity and brand dedication that can be earned by simplifying the financial component of a business relationship.
4. Help payments move more efficiently
Exporters may be paid sooner when they submit invoices in the importer’s local currency, as compared to invoicing in USD. This is because the importer’s local bank, and other potential intermediaries, does not need to be involved in the currency exchange process. By reducing the number of parties involved, financial transactions are more likely to be settled faster.
The same rationale applies to having a multi-currency account in your customer’s country. By eliminating the currency exchange process and depositing money directly into your foreign account, the payment process is expedited.
With the ability to wire foreign currency to almost any country in the world, UMB can help you conduct business in the global payments industry. For more information on our foreign exchange services, please visit our website.
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