Paying and invoicing suppliers overseas - cost efficiently

Posted on the 21st July 2016 in SME blog

Paying and invoicing suppliers overseas

One of the biggest challenges faced by many small and medium sized companies (SMEs) which trade internationally is finding the most cost efficient way to pay their overseas suppliers. 

With little control or visibility over when the money will be received and the risk of adverse exchange rate movement in the time it takes from sending the invoice to receiving the payment, cross-border payments can be a real headache and represent a significant impact on cash-flow.

One conversation we often have with our clients is about trying to time payments by second guessing exchange rate movements. In reality, this could be described speculating on the currency markets with company funds, which is a risky game to play and not one we would recommend.   Instead we have outlined below our thoughts on the two most effective ways to mitigate the risk of exchange rate fluctuations and excessive foreign exchange costs.

Open a foreign currency account

Businesses which regularly invoice customers and pay suppliers overseas will invariably benefit from opening foreign currency accounts in their most-used currencies. A foreign currency account allows you to bill in the international customer’s own currency and also pay suppliers in their domestic currency.  When we suggest this to our clients the idea is often questioned, the thinking being that it brings added foreign exchange risk and costs, plus it’s just extra thing to worry about and manage.

However, once you begin to look at it in more detail, it makes sense. Ultimately the cheapest way of converting money is not to convert money. I know - a strange thing for an online global payments company to say! But bear with me. One of the biggest advantages of a foreign currency account is avoiding conversion costs. If your business receives US dollars which you can hold in order to make US dollar payments, you are avoiding having to convert the currency back and forth.  Over time these savings really add up! Furthermore, billing a customer in its native currency removes the currency conversion costs and burden from the customer, and is often perceived as equivalent to offering a discount.

Moving money between domestic and overseas bank accounts is expensive and it’s no secret SMEs are overcharged and underserved by traditional payment providers for this service.  Research by payments consultancy Accourt found that currency exchanges with traditional payment providers, can cost up to 4%, some even higher.  Add to that the fact it is almost impossible to compare prices and the lack of transparency on fees and spreads and holding a foreign currency account seems to make perfect sense.  It also saves you a fair bit of hassle too!

A foreign currency account can be managed in the same way as a standard current account, and as with any domestic account, there are costs involved. But if you are regularly paying suppliers this outlay will soon be covered by the cost you would have accrued in bank charges.

If you are new to doing business overseas or planning on expanding your operation, then you should review the different accounts and options available, and investigate what banks can offer you.

We know that banks may often be reluctant to open foreign currency accounts for their SME clients, citing anything from costs to anti-money laundering concerns. Calmly but firmly pointing out that the banks are supposed to be supporting UK plc to increase overseas trading normally prompts a re-think!

Book a forward

Another solution, if you choose not to go down the route of opening a foreign currency account, is a forward payment.  A forward payment allows you to lock-in an exchange rate for a pre-specified date in to the future.  Forwards can be useful if you require certainty over the local equivalent of a known future invoice or receivable, or simply want to ensure that a currency exchange is made at or below your accounting reference exchange rate.

For example, you may have a US-based customer who often takes up to 90 days to pay an invoice.  A forward payment allows you to lock in an exchange rate for 90 days into the future. This means that regardless of how long the US clients take to pay the invoice, you are protected against any exchange rate fluctuations.

By adding these two simple steps to your business’s FX strategy you will be well on track for significant cost reduction, exchange rate risk control and enhanced efficiency.

Read how Ward Trade Marks uses forward payments in their FX strategy.

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