4 benefits to paying foreign suppliers in their own currency

June 09, 2022

Does your organization pay foreign suppliers in their own local currency? With U.S. imports at an all-time high, discover four reasons to consider a break from traditional U.S. dollar payments.

As imports to the U.S. have risen to record highs, businesses are finding themselves making more payments to foreign suppliers. In addition, they’re faced with the question of what’s more optimal, paying in U.S. dollars (USD) or in the supplier’s local currency.

Many organizations begin their international relationships without contemplating the most beneficial payment currency for invoices. For U.S. organizations, settling invoices in USD may seem the easiest, most hassle-free way to pay. However, there may be benefits to paying invoices in your supplier’s local currency. Some of those include:

  • Earning discounts on purchases
  • Extending payment terms
  • Fixing payment amounts and settlement terms
  • Improving trading partner relationships
     

It may be impossible to discern whether these benefits could apply without simply asking. Start a dialogue with your foreign suppliers. Ask if they’re willing to be paid in their local currency, rather than in your local currency (USD). Quite often, these conversations can change the tenor of the relationship and lead to mutually beneficial terms.

For years, the majority of U.S. imports have been invoiced and paid in USD. “So often U.S. companies view making payment in U.S. dollars as simple, easy and risk free,” explains Mary Henehan, managing director & co-head of Foreign Exchange Sales at U.S. Bank.

“It’s likely they’ve simply ‘always done business that way,’ and may not have reconsidered the practice,” she says. "The reality is that paying invoices in the currency of the originating supplier isn't so complicated, and it can have benefits. After all, you're offering a convenience to your supplier. There can be value in that.”

The lack of communication on optimal payment currency goes both ways. Most foreign suppliers begin invoicing in USD and continue to do so when no one questions the practice.

“As a U.S.-based importer, you should absolutely have this discussion with your suppliers,” advises Adam Towers, vice president and group product manager, Global Solutions, at U.S. Bank. “There are quite often hidden costs associated with paying foreign suppliers in U.S. dollars.”

 

1. Earn a discount on purchases

Although not all U.S. organizations realize it, they generally pay a premium on imports when they pay in USD. Foreign suppliers build a premium into the USD price of goods to protect against possible exchange rate fluctuations that could result in less local currency-equivalent for them upon conversion. They may also add to the price to offset bank fees for converting USD to their local currency.

For example, if a widget costs $1,000 in USD terms, the supplier may charge $10 as padding for currency movement, and then might even add another $10 to cover their conversion fees – bringing the total to $1,020 USD.

“If foreign suppliers are billing you in U.S. dollars, they’re typically going to ‘pad’ the price of your goods by up to two percent or more," Henehan says.

Instead, if you pay in the supplier’s local currency and eliminate their foreign exchange (FX) risk, you can potentially negotiate a discount, she says.

“If foreign suppliers are billing you in U.S. dollars, they’re typically going to ‘pad’ the price of your goods by up to two percent or more,”

2. Extend payment terms

In addition to the cost savings mentioned above, U.S. importers willing to settle invoices in their supplier’s local currency can often negotiate extended payment terms as well, Towers says.

 “When a foreign supplier is getting paid in U.S. dollars, they prefer shorter payment terms to minimize the time during which adverse currency-value fluctuations can occur,” he says. “If you agree to pay in the supplier’s local currency, and hence assume the FX risk, the supplier will generally be more open to extending terms.”

 

3. Fix payment amounts and settlement terms

When a U.S. importer pays in a foreign currency and assumes the FX risk, there’s a common risk-mitigation strategy. The buyer can use a bank hedging instrument, such as a forward contract, to lock in the USD value of the payment – or “invoiced amount” – between the time of billing and the time of payment. Fixing an exchange rate through hedging is typically less expensive for the U.S. importer than paying the premium a foreign supplier adds to the cost of goods when invoiced in USD.

"The reality is that paying invoices in the currency of the originating supplier, via the right payments platform, isn't so complicated, and can have benefits,” Towers says. “After all, you're offering a convenience to your supplier, who won't need to convert U.S. dollars to their local currency. There can be value in that."

“FX hedging provides the buyer with certainty regarding the amount of the payment and also provides fixed settlement terms,” Henehan says.

 

4. Improve trading partner relationships

What’s more, offering to pay your foreign suppliers in their local currency can engender loyalty and goodwill. “Many suppliers will consider it a huge benefit,” Towers says.

“They know exactly how much they’ll be paid for each transaction, they’re no longer managing the foreign exchange risk, and they can price their products more competitively.”

 

Contact your banking partner to learn more about FX risk mitigation and paying your foreign suppliers in their local currencies.

 

Related content

The benefit of a multi-jurisdictional European trustee

Digital Onboarding helps finance firm’s clients build communities

P2P payments make it easier to split the tab

How Everyday Funding can improve cash flow

How to accept credit cards online

How real-time inventory visibility can boost retail margins

Payment industry trends that are the future of POS

6 risks you need to manage when expanding your global footprint

Automate accounts payable to optimize revenue and payments

Want AP automation to pay both businesses and consumers?

Ways prepaid cards disburse government funds to the unbanked

When your spouse has passed away: A three-month financial checklist

Increase working capital with Commercial Card Optimization

6 timely reasons to integrate your receivables

Webinar: CRE technology trends

ABCs of APIs: Drive treasury efficiency with real-time connectivity

Automate escheatment for accounts payable to save time and money

Webinar: CSM corporation re-thinks AP

Escheatment resources: Reporting deadlines for all 50 states

Higher education and the cashless society: Latest trends

Managing the rising costs of payment acceptance with service fees

4 benefits to paying foreign suppliers in their own currency

Safeguarding the payment experience through contactless

COVID-19 safety recommendations: Are you ready to reopen?

Understanding and preparing for the new payment experience

Overcoming the 3 key challenges of a lump sum relocation program

The benefits of bundling services for Luxembourg regulated funds

Luxembourg funds: 5 indicators of efficient onboarding

4 reasons your Luxembourg fund needs an in-market administrator

Combined strength: Luxembourg and your fund administrator

How jumbo loans can help home buyers and your builder business

How to apply for a business credit card

Rethinking common time management tips

Checklist: What you’ll need for your first retail pop-up shop

Streamline operations with all-in-one small business financial support

White Castle optimizes payment transactions

Access, flexibility and simplicity: How governments can modernize payments to help their citizens

Tap-to-pay: Modernizing fare payments pays off for transit agencies and riders

Restaurant survey shows changing customer payment preferences

Dear Money Mentor: How do I begin paying off credit card debt?

3 awkward situations Zelle can help avoid

How to save money in college: easy ways to spend less

Government agency credit card programs and PCI compliance

5 Ways to protect your government agency from payment fraud

Unexpected cost savings may be hiding in your payment strategy

Benefits of billing foreign customers in their own currency

Top 3 ways digital payments can transform the patient experience

Hospitals face cybersecurity risks in surprising new ways

Modernizing fare payment without leaving any riders behind

3 benefits of integrated payments in healthcare

Webinar: AP automation for commercial real estate

Depositary services: A brief overview

Crack the SWIFT code for sending international wires

Myth vs. truth: What affects your credit score?

Dear Money Mentor: How do I set and track financial goals?

Three healthcare payment trends that will continue to matter in 2022

How mobile point of sale (mPOS) can benefit your side gig

Webinar: Robotic process automation

3 ways to make practical use of real-time payments

Hospitals face cybersecurity risks in surprising new ways

Enhancing the patient experience through people-centered payments

Digital trends poised to reshape hotel payments

Restaurant survey shows changing customer payment preferences

Unexpected cost savings may be hiding in your payment strategy

Colleges respond to student needs by offering digital payments

Improve government payments with electronic billing platforms

Luxury jeweler enhances the digital billing and payment customer experience

How Everyday Funding can improve cash flow

Disclosures

Notice: Foreign-denominated funds are subject to foreign currency exchange risk. Customers are not protected against foreign currency exchange rate fluctuations by FDIC insurance, or any other insurance or guaranty program. Deposit accounts with non-U.S. financial institutions offered through U.S. Bank are not deposits of U.S. Bank and are not insured by the FDIC. 

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.