The global outlook for 2021 sees an economic recovery with year-on-year growth rates predicted to reach 4.5%. This means global trade is once again on the rise and a harbinger of good things to come. For businesses dealing with suppliers or customers abroad, global payment solutions, when done with the right payments partner, can offer numerous advantages that can only improve their bottom line.
In our last blog, we talked about taking the first steps in mitigating the various risks in dealing with currency exchange. This time let’s delve into the benefits of paying in your vendor’s local currency. Little known fact, if you pay in your vendor’s local currency, versus US dollar, the rate of exchange and cost are calculated upfront. This means your vendor can remove inflated USD costs to cover the exchange and you can ensure the full invoice amount gets to your supplier. It’s a win-win situation. Let’s look at the benefits that you should take advantage of when you pay in local currency.
1. You’ll get favorable exchange rates.
In your line of business, the payments you make in US dollars to your international supplier’s bank will mean that the recipient foreign bank will have to convert the payment to the local currency. Your supplier might not have an established relationship with their bank, nor do they have the negotiating power which can result in a poor exchange rate for your payments. That poor exchange rate is then passed on to you as a hidden cost in your invoice. With the help of a dedicated payments provider, you can actively manage exchange rate risk internally by paying in the local currency and can also remove the threat of fluctuating rates by hedging or targeting an exchange rate.
2. You’ll get a better deal with pricing discounts.
Paying in the local currency can be an incentive for some suppliers to offer a discount on pricing for the goods you are purchasing. Some parts of the world also have currency exchange rate premiums that hover around 10%. Without the risk of unfavorable rates and unwanted premiums, they may be willing to offer a 1% to 5% discount for your purchase. If your transaction is worth $500,000 worth of goods, that’s an extra $5,000 in your pocket.
3. You are guaranteed payment visibility and accuracy.
Using a trusted payments provider to help with your local currency payments removes potential intermediaries and inaccuracies. There is no need for your trading partner to do any currency conversions with their financial institution that will eat up time and delay the payment process. Remember that the value of when a payment is approved and when it lands in your vendor’s bank account can be different because of FX currency fluctuations. When you pay local you also streamline the process which benefits both parties involved.
4. Accounts reconciliation will no longer be a headache.
If you pay your trading partner in US dollars instead of their local currency you run the risk of the vendor struggling to match the amount on the invoice versus the converted amount. This may result in an inaccurate amount of payment credit to your account. For example, if you pay a supplier in China 100,000 RMB, that exact amount will be credited as opposed to looking at a US $15,370 payment, which can create confusion.
5. You’ll gain a good relationship with your trading partner and improve cash flow.
Local currency payments will save your foreign trading partner unexpected transaction costs and the inconvenience of currency conversion. It also guarantees their profit margins. With this perk, your suppliers in turn might be willing to not only offer you discounts, but you can potentially negotiate an extension for payment of goods. An extension will not only help with your cash flow but will give you time to recoup investments. Let’s not forget that establishing good relationships have monetary implications for both parties. Trading partners should not overlook the benefit of having a trusted and established trading partner by making the financial component of the relationship less complicated.
However, it’s worth noting that the tips we covered above do not necessarily apply to everyone. In fact, if a business is in a commodity-focused industry, such as oil or soybeans, then typically the business would need to buy and sell US dollars. Other exceptions include businesses that have US dollar-denominated debt or a need to offset any existing hedges with the US dollar.
With all the benefits of paying in the local currency listed above, all you need is to partner with moneycorp. Our dedicated foreign exchange specialist can provide you with tailor-made global payments and risk management solutions that are right for your business.