If you do business with foreign companies and need to make foreign currency bank transfers, there is no doubt you’ve already asked yourself that question: “Should I pay in dollars or in my trade partner’s own currency?”. In the world of international trade, this question comes up regularly. Among the many aspects you need to think about is the question of how to deal with currency exchange.
When it comes to international payments in B2B, using dollars appears to be common practice around the world. After all, the dollar has long been a dominant currency, or reserve currency, and represents a safe value, not to mention it is accepted nearly everywhere. As a result, many often wrongly assume that foreign suppliers are happy to be paid in dollars.
Some companies with USD accounts also believe that by paying in dollars they are eliminating foreign exchange risk on their end and handing over the prickly issue of how to deal with change to their foreign trade partners. By doing so, your company is externalising the risk of foreign exchange to your trade partners and their local bank. This will come at a price. After all, unless your suppliers also possess accounts in dollars, they will have to exchange your dollars to their own currency eventually and will have to deal with the issue of currency exchange.
Because exchange rates are volatile, there is a risk they may change between the date you enter into the transaction and the value date. To overcome this uncertainty and counteract this risk, your trade partners will pad their invoices to ensure their profits in case of dollar depreciation. On top of that, your trade partners know their banks will add transaction fees to receive and process foreign currency payments. They will add a margin to compensate these exchange costs too. So the real question is how to manage the costs of FX to your advantage?
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Remember Whether or not these additional costs are explicitly detailed on your vendors’ invoices, you can be sure that they are making you bear them. By asking your trade partners to draw up their invoices in dollars as well as in their own currency, you can have more insight into how they are protecting themselves. |
You may be surprised to discover that paying in your trade partner’s local currency can have significant advantages. In fact, it could make your life and theirs easier, and here’s why:
By paying your trade partners directly in their currency, you lock in the contract’s value and liberate them from the hassle of dealing with exchange fees. This saves your trade partners from adding those extra costs to cover possible exchange rate fluctuations and lets you negotiate competitive exchange rates and better transaction fees. In fact, an Aite Group survey noted that 60% of U.S. middle market importers receive average discounts of 1% to 2% when they pay their foreign suppliers in their currencies[1]. By turning to a financial institution like iBanFirst you can receive the same financial services that large multinational companies receive from traditional banks and have access to real-time exchange rates, enabling you to save money along the way.
If you pay your trade partners in dollars and they don’t have accounts in that currency, your money will be converted at a rate prescribed either by your bank or by the receiving bank. This means that neither you nor your trade partner will have any certainty or control over the exchange rate applied. Additionally, your bank may not have the capacity of converting directly to your trade partner’s currency and will need to resort to using an intermediary bank. By assuming the currency exchange upfront, you have more visibility on the outcome. Being in control of the foreign exchange risk means you can implement currency risk management tools and strategies. Hedging is one of those. There are many types of currency hedging solutions, and your bank or payment service provider (PSP) can help you assess which solution best fits your needs.
By accepting to handle the currency exchange, you’re doing your trade partners a favour: the payment process is smoother, buyers know the exact cost upfront and suppliers don’t have to think about calculating how to receive the correct amount. Simplifying the financial aspect of a business relationship can give your company a competitive edge and can go a long way towards fostering good, long-term customer relations.
Not all banks are suited to carry out cross-border payments in foreign currencies. Some do not accept to handle currency exchanges between less common currencies and must necessarily use an intermediary currency as well as an intermediary bank. Here are some questions you should ask yourself: does my bank support my trade partner’s currency? Does my bank have specialists who can help me set up international payment strategies? Does my bank provide hedging solutions? In some cases, payment service providers specialised in cross-border payments are better equipped to respond to foreign exchange needs and can offer better services than traditional banks.
Finally, your company may also want to think about how it is handling its international payments. When the time comes for an international company to pay, there are several ways to optimise cross-border payments, so you have more leeway to invest in growth. From opting for real time exchange rates to adopting hedging strategies, there are several ways you can limit expenses to build a strong business expansion strategy.
[1] “The Benefits of Paying Non-U.S. Suppliers and Business Partners in Their Local Currency,” Aite Group, February 2011.