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When it comes to foreign transactions, the U.S. dollar isn’t always king. Thus, knowing when to pay international vendors in local currency vs. USD can help prevent reconciliation hassles and pricing markups.
There’s no denying the U.S. dollar has a lot of gravitational pull in the world of international payments. Most companies that use U.S. dollars to pay overseas vendors do so simply because it’s efficient. Perhaps the treasury policy calls for it, and if your vendor doesn’t mind, why not?
But if your vendor isn't subject to the dollar’s universality and has shown an inkling of interest in receiving payment in their local currency, it’s time to change your approach. In most instances, ditching the U.S. dollar means you can eliminate currency conversion headaches and costs. Here are the top considerations to make to ensure an informed decision.
Should I pay in local currency or USD? That’s the million-dollar question. For the million-dollar answer, start by considering the benefits of paying vendors in local currency.
Paying in U.S. dollars can create challenges for your international vendors. On the other hand, paying in local currency might mean vendors enjoy all-around convenience. No more delays in receipt of funds or trouble reconciling accounts.
Instead, vendors can easily match your payment credit to settled invoices, making the account reconciliation process faster. In addition, paying in local currency means faster payments and reduced invoice status inquiries.
When your supplier has commodities priced in their local currency and you pay in USD, the only recourse is to convert the funds. It may be convenient for you, but it increases vendor risk. As your payment travels through the international banking system, it picks up conversion fees.
Since exchange rates tend to fluctuate wildly, conversion losses can be higher on some days. The vendor often chooses not to make it their problem by passing the costs on to you.
As stated, vendor risk means your USD payment might have a lower value than expected due to conversion fees and losses. Most international vendors have gotten good at anticipating the discrepancy. They’ll quote a premium when invoicing you in USD to ensure the deal is in their favor.
By contrast, you could unlock pricing discounts by asking your vendor to invoice you in their domestic currency.
Paying in local currency can streamline cash flow in one of two ways. For starters, cross-currency payments are faster, unlike USD transactions which take longer to land in the vendor’s account. That means you can afford to pay at the last minute without worrying about delays that can lock up funds for days.
This extra availability of funds allows you to enjoy more working capital availability without messing up your payment timing. Second, agreeing to pay in their preferred local currency makes your vendor more amenable, allowing you to negotiate more favorable pricing and extended payment terms, which can do wonders for your cash flow.
While it’s true that you and your supplier both enjoy the benefits of switching from USD to local currency payments, this isn’t a true win-win situation because you have assumed the F.X. risk. The good news is that F.X. risk management instruments can help you navigate possible currency fluctuations and ensure you only transact when exchange rates are in your favor.
A forward contract allows you to lock in your desired exchange rate for a future payment, so your payment is a known fixed amount. Hence, you’re no longer at the mercy of exchange rate swings when paying vendors in their local currency.
With a market order, you can manage your risk by setting upper and lower limits for exchange rates. Once the market moves to your desired level, you can capture a favorable rate. On the other hand, if the market moves unfavorably, you can still control your downside risk.
When deciding whether to pay international vendors in local currency, there’s one more essential consideration: What’s the best way to make the payments? MTFX’s global payments solutions leverage the latest technologies to make your life easier when handling international payments in local currency. By opening an MTFX business account, you can experience the following benefits:
Open an account with MTFX today to save money and simplify your payments to non-US vendors.
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