Have you considered paying foreign suppliers in their local currency?

Author:Wilcox, Casey
Position:FINANCE - Report

It can pay to reevaluate traditional ways of paying suppliers. Most U.S. businesses are overlooking a simple strategy that could help them reduce the cost of their imported goods by as much as 10 percent or more--and in some cases extend their payment terms--without exposing them to additional risk or loss. The tactic to consider? Paying overseas suppliers in their local currency, instead of the U.S. dollar (USD).

In the aftermath of the Great Recession of 2008, more U.S. companies are importing to strengthen their global supply chains. In fact, from 2009 to 2013, the dollar value of U.S. imports increased nearly 42 percent, according to U.S. government statistics.

At the same time, the vast majority of U.S. importers continue to pay their suppliers in USD, a traditional approach that, with the rise in imports, has U.S. businesses leaving a lot of money--and other benefits--on the table.

With the post-financial-crisis years ushering in greater supply-chain collaboration, the environment is ripe for importers to talk to their suppliers about accepting payments in the suppliers' local currency, and for discussing how everyone can benefit from this practice.

'We've Always Paid in Dollars'

If it's not always the wisest course, why do so many U.S. businesses pay their international suppliers in USD? How did that become the norm?

It starts with the fact that for many years, the U.S. dollar has been the world's dominant currency. That being the case, U.S. companies have often mistakenly assumed that their overseas suppliers always want to be paid in USD.

Many U.S. firms also believe paying in U.S. dollars eliminates foreign exchange (FX) risk and volatility from their international payables. While this intuitively makes sense, what these companies fail to realize is that currency risk and volatility are embedded in every cross-border payment. The real question is: Who will manage and reduce FX costs most effectively?

What also doesn't always register with many U.S. businesses is that, ultimately, their overseas suppliers need to convert their USD payments into the local currency. And that foreign exchange conversion carries a cost that can diminish suppliers' margins--and threaten their ability to meet profit targets.

Additionally, some U.S. importers aren't aware of how their suppliers are responding to the added risk and uncertainty of accepting such payments. When invoicing in USD, suppliers can't be sure of the value they will receive from...

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