When you think about whether there’s a way to improve how your organization pays for imports, there are four goals to consider:
To work toward achieving these goals, there’s a simple strategy your organization, as a U.S. importer, can employ. Ask your foreign suppliers if they’re willing to get paid in their local currency, rather than the usual U.S. dollar (USD).
For years, the majority of U.S. imports have been paid with USD. “Many U.S. companies view making U.S. dollar payments as simple and easy — they’ve always paid that way, and they feel comfort in knowing exactly how much is coming out of their account,” explains Sheryl Wilhelmy, vice president and international product group manager at U.S. Bank. “They shy away from foreign exchange (FX) because it seems complex.”
Furthermore, most foreign suppliers invoice in USD and no one questions this practice. As a U.S. buyer, you should question this, advises Joshua Quiroz, senior vice president and head of electronic foreign exchange sales at U.S. Bank. “There are hidden costs associated with paying foreign suppliers in U.S. dollars,” Quiroz points out.
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 price of goods to protect against possible fluctuations in USD value and to offset bank fees for converting USD to their local currency.
“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,” Quiroz says.
Instead, if you pay in the supplier’s local currency and eliminate their FX risk, you can potentially negotiate a discount, he says.
Cost savings, in the form of discounts, is probably the main reason to consider this strategy. However, U.S. importers paying in their foreign supplier’s local currency can often negotiate extended payment terms, Quiroz says.
“When a foreign supplier is getting paid in U.S. dollars, they prefer shorter payment terms not only for cash flow reasons, but also 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 assume the FX risk, the supplier will generally be more open to extending terms.”
When a U.S. buyer 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 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 paid in USD.
“FX hedging provides the buyer with certainty regarding the amount of the payment and also provides fixed settlement terms,” Quiroz says.
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,” Quiroz 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.