Despite supply chain and border restrictions easing in today’s post-pandemic global marketplace, transactions with overseas vendors still leave much to be desired. Treasury policies, like requiring international payments to be denominated in US dollars, have been the standard for years. But these policies are outdated and often harm a firm’s bottom line with increased embedded costs, reconciliation headaches, and incredibly high premiums. 

For US businesses wanting to optimize their foreign transactions, a reexamination of their internal vendor payment policies is essential. With this in mind, here is everything you need to consider when deciding whether your firm should pay vendors in local currency vs. U.S. dollars. 

Understanding How Foreign Currency Works

Commonly referred to as “the world’s currency,” the U.S. dollar is the king of the global market. More trade is transacted in dollars than any other currency, and with many commodities priced in U.S. dollars regardless of where the transaction is happening, it’s clear that paying invoices in USD is a fairly common practice.

Despite the dollar’s universality, the economies of foreign nations are based on their own domestic currency. So, for U.S. companies paying invoices in dollars, the receiving foreign company will eventually still need to convert the funds into its local currency. So, while paying in dollars may seem more convenient to the U.S. company at first glance, this convenience ultimately always comes at a cost. 

Every payment in USD to an overseas vendor requires there to be a conversion to the foreign company’s own currency and each correspondent bank the transaction travels through will charge a hefty fee to do so. Knowing that these conversion fees are on the horizon, foreign vendors will often increase the price to purchase their goods by 10 percent or more to cover these increased costs. Should these mark-ups remain at a reasonable increase? Unfortunately for many of these US companies, that’s up to the vendor to decide. 

Should I Pay in Local Currency or USD?

With U.S. imports at an all-time high, it’s more important than ever for organizations to streamline and optimize their international invoice payments. For many organizations, settling invoice payments in USD may often seem like the easiest and most hassle-free way to pay. But doing so puts you at risk of missing out on some major benefits. 

Pricing Discounts

As previously mentioned, vendors often build a premium into the USD price of their goods in an effort to offset expected bank conversion fees and protect against possible exchange rate fluctuations. For example, if a good cost $100,000 in USD terms, the vendor may charge the U.S. company $10,000 as a protection for future currency movement, and may even add an extra $10,00 simply to cover conversion fees. This brings the total price of the good to $120,000 when paid in USD.

Now, with few foreign suppliers owning U.S. dollar accounts, control of these expected conversion fees lies in the hands of the banks. So, while adding a premium to the purchase price of a good may create some protection, it doesn’t necessarily guarantee that the vendor won’t lose money on the conversion. 

When you offer to pay in the vendor's local currency, you're eliminating their foreign exchange risk which gives you a leg up to start price negotiations on good terms. 

Extended Payment Terms

Just as paying in local currency can give you a headstart with negotiating price discounts, the same can also be true for negotiating payment terms. USD payments to overseas suppliers often result in delays as the exchange transactions go through several checkpoints before landing in the vendor’s account. 

Foreign suppliers typically prefer short payment terms so as to minimize the time during which adverse currency movements may occur. However, when you assume your supplier's FX risk by agreeing to pay in their domestic currency, you're more likely to get extended terms for your final payments. 

Fixed Payment Amounts

With all that said, just because you decide to pay in local currency doesn't always mean that you have to take on all the risks associated with the foreign exchange market. Risk-mitigating strategies, like forward contracts, allow buyers with overseas vendors to lock in the USD value of their payment. Meaning, that even if the exchange rate changes between the time of billing and the time of payment, the buyer’s payment to their vendor stays at that fixed amount. 

These types of contracts, and other similar risk-mitigating strategies, are commonly used by financial institutions to help hedge against uncertain market fluctuations. Forward contracts, in particular, are great for both buyers and sellers operating with tight cash flows or even budget restrictions because they allow you to know exactly what you’ll be paying month to month. 

Simplify Your Vendor Payments

With all that said, it's clear that paying your non-U.S. vendors in their local currency not only saves money but can also significantly improve partner relationships with increased transparency, more effective reconciliation, and long-term payment stability. 

Want to experience the many benefits of local currency vendor payments yourself? Moneycorp’s Global Payments Hub helps businesses handle domestic and international payments by simplifying both payer and payee workflows through a suite of technologies designed to reduce overhead, optimize the payee experience, and mitigate risk in today’s global economy. 

About Thomas Anderson

Thomas Anderson is the managing director at moneycorp where he also runs the structured solutions team. Prior to joining moneycorp in 2009, Thomas was a Managing Director in the FX Advisory Group at Bank of America for 12 years. At Bank of America, he held various senior FX advisory roles including FX Manager for the Asset Based Lending and Real Estate Divisions, team leader for the middle market, and small business FX groups. 

Prior to joining Bank of America in 1997, Thomas was a VP in the FX Group at First Union (Wells Fargo now). Thomas holds a BA from the University of Massachusetts Amherst and an MBA from Queens University in Charlotte, North Carolina. 

Connect with him on LinkedIn!