4 benefits to paying foreign suppliers in their own currency
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:
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.”