Benefits of billing foreign customers in their own currency
U.S. exporters can become more competitive in foreign markets by pricing their products or services in foreign currency over U.S. dollars.
Conducting business across borders has many considerations for both exporters and importers. There is a currency conversion in nearly every international payment, making the currency used when invoicing foreign customers or paying a foreign supplier an important consideration. After all, when the value of the U.S. dollar (USD) rises, that actually makes U.S. goods more expensive to foreign buyers.
“Recently, the Canadian dollar (CAD) weakened by 2.9% against USD in a one-month period, making U.S. products more expensive to Canadian companies. A U.S. company invoicing its Canadian customers in USD has shifted the foreign currency risk to their customers,” explains Mary Henehan, managing director & co-head of Foreign Exchange Sales at U.S. Bank. “Since this recent move increased the purchase of $1 million USD by approximately 29,000 CAD, a U.S. exporter will need to consider how this impacts future sales and how they’ll remain competitive.”
International payment activity continues to increase, creating more focus on the currency used in international payments and the need to mitigate foreign exchange exposure. An article published by The Economist in Oct 2021 reported that a record $140 trillion was transmitted across borders in the first 3 quarters of 2021, equivalent to 152% of global GDP. During that time, U.S. imports increased to an all-time high as U.S. consumer demand has rebounded.
The surge in imports created more opportunities for importers to manage exchange risk by paying suppliers in their own currencies. At the same time, U.S. exports also saw strong growth as global demand picked up, recent trade data reflected an increase of 5.6%. In fact, the U.S. reported record exports to 57 countries, so exporters also have more reasons to consider the advantages of controlling the timing and terms of foreign exchange.
“A common misconception is that a foreign denominated account is necessary if you will be receiving payment in foreign currency, this isn’t necessary."
Why invoice foreign customers in their own currency?
It’s not hard to understand why many companies price their exports in USD. The accounting may seem easier and more straightforward. Changing time-honored business practices may seem difficult. Yet the downside of shifting the foreign currency risk to customers in a volatile market could create a negative impact on sales.
The global trade environment continues to be impacted by many factors, pandemic concerns, inflationary impacts and global interest rate increases. These factors have contributed to a sharp rise in the U.S. dollar which has risen to its highest level in 20 years.
U.S. exporters can combat these issues by considering pricing their products or services in foreign currency over U.S. dollars. Invoicing customers in their local currency has many benefits, including:
“Companies that export and import goods from the same foreign country can create efficiency when the cost of imports and exports is in the same currency,” Henehan notes. “The company has foreign receivables in a currency that match their payable needs. To the extent the receivables equal the payment need, the company has eliminated their exposure to the value of that currency, which is a natural hedge.”
Is it hard to price goods in a foreign currency?
A common misconception is that a foreign denominated account is necessary if you will be receiving payment in foreign currency, this isn’t necessary. Payments can be converted by your bank when they are received and if currency risk is a consideration, your bank can help you address that risk very easily.
“A foreign customer or partner can send the foreign currency denominated payment to your bank, your bank can provide the wire transfer instructions to you,” Henehan explains. “International payments are easily made via the SWIFT network. Upon receipt of the foreign denominated wire your bank can convert the foreign currency to U.S. dollars for deposit to your checking or savings account.”
When invoicing foreign customers in foreign currency, the currency risk is transferred to the U.S. exporter. Mitigating the currency risk can be done easily, ensuring margins aren’t at risk.
“Your bank can provide value in understanding the risk and how you might choose to manage it,” Henehan says. “For example, many companies use forward contracts to ensure the USD value of the foreign receivable is fixed.”
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.