Paying a foreign vendor? Avoiding U.S. dollars could cut costs and increase payment speed
Our foreign exchange team regularly hears from business customers about the benefits of avoiding sending U.S. dollars and instead paying in the local currency. These benefits typically apply to both one-time major expenses, such as capital equipment, and ongoing purchases, such as inventory for resale.
There’s a common misconception that it’s more complicated to transact business in foreign currencies. There’s no question that wiring U.S. dollars is an easy process. But it’s not any more difficult to request your banker to make the exchange for, say, euros and to transact in euros. It’s an “everyday” process, not a special situation.
Whether your businesses, or your client’s business, has foreign purchases that are “everyday” or “every now and then,” transacting in a vendor’s local currency instead of U.S. dollars can be beneficial. Below are three key benefits every business should consider when transacting in foreign currencies.
- Better exchange rates can cut and control costs
You can avoid unfavorable “surprise” rates by changing the currency in the U.S. through your bank partner. If the currency is sent in U.S. dollars, the exchange rate can be up to the discretion of the foreign bank that ultimately makes the foreign exchange. The exchange rate used by the foreign bank will almost certainly be less attractive than you can obtain stateside for the same conversion. Control your costs, and your exchange rate, by making that exchange before sending payment.
For example, if you know you’ll be making an ongoing series of purchases in Japanese yen, you might like to lock in an exchange rate for a quantity of dollars that represents a certain percentage of quarterly transactions. Or, if you know you’ll be making an unusually large order, you could lock in an exchange rate when placing the order rather than waiting until you pay for it.
- Potential pricing discounts can provide significant savings on large expenses
Suppliers can often offer discounts—often in the range of 1-2 percent —when invoicing you in the local currency instead of dollars. The foreign vendor can offer this since they no longer have to markup the invoice to cover their bank’s change fees. When your supplier knows exactly the currency value they’ll be receiving, they can be more precise—and often more generous—in their pricing. The supplier wins by eliminating surprises.
Sometimes we even hear business clients report receiving five percent discounts. A one to two percentage point discount on purchases can result in a significant positive impact on startup-phase cash flows. Even one percent is $10,000 on a million-dollar purchase.
- Increasing payment speed can improve efficiencies and relationships
Payment speed can be delayed based on the time it will take the local foreign bank, and other potential intermediaries, to make the conversion. By sending in the local currency, the foreign bank no longer needs to convert funds upon their receipt—a process that often delays payments for two or more days.
This increase in payment speed not only creates efficiencies within your business, it also strengthens your business relationships. For example, if you are a value-added reseller that regularly imports goods from Asia, your Asia-based suppliers are likely to have more loyalty to you as a customer—and provide you with better service and longer payment terms—if you save them the uncertainty associated with currency conversion from dollars to their own currency.
Transacting in foreign currencies helps you cut costs by mitigating risk
Anytime there’s a foreign transaction, there’s exchange-rate risk. And not surprisingly, sellers will attempt to shift the burden of that risk onto buyers. The good news is that addressing that risk proactively doesn’t require you to add complexity to your transactional patterns—again, the “everyday” nature of converting currency stateside rather than wiring dollars.
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, visit our website or contact us.
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