HOW TO LOWER COSTS WITH LOCAL CURRENCY PAYMENTS Foreign payments strategy for international business moving money for better CASH MANAGEMENT
A sound strategy can turn international payments into a key competitive advantage.
Paying in dollars: a costly convenience Today, North American businesses are in a privileged position when it comes to making international payments. Dollars are accepted almost everywhere, so if an American business doesn t want to worry about dealing in foreign currencies, it doesn t have to. On invoices, everyone speaks in USD. But, whether your business is based in North America or elsewhere, cross border dollar disbursements aren t as simple or straightforward as they look. The foreign exchange (FX) component of paying recipients whose costs are priced in a foreign currency isn t eliminated: it s just outsourced to your beneficiary or their bank. At some point, your recipient still has to convert your dollars back into their local currency. When you pay foreign beneficiaries in dollars, you expose them to currency risk. To counteract this risk, foreign firms often build a buffer into their invoices, insulating their profits in case of dollar depreciation, and offsetting any conversion or receiving fees charged by their bank. convenience=costs If you re paying in dollars, the extra costs can be invisible The majority of international business payments are priced and settled in dollars. 8% 28% $ 44% Takeaway: Paying in dollars can have its advantages, but it s not without risk.
Local currency payments: an effective alternative When foreign business partners insulate their dollar denominated invoices as a way of pro-actively managing their currency risk, they re swapping their own potential currency-related loss, for an actual cost-related loss to your business. To reduce risks for your recipients and unnecessary costs for your business, why not pay foreign business partners in local currency? Paying in local currency may alleviate additional costs, make payments more transparent and streamline the delivery of funds while eliminating fees and delays along the way. local=efficient Funds are transmitted directly, without additional intermediaries! Remember: Your recipient will eventually translate your dollar payments back into local currency, and any additional charges associated with doing so might be passed on to you in the form of higher costs. Takeaway: Paying in local currency removes risk and reduces costs by eliminating intermediaries. This means greater transparency, efficiency, and cost-effectiveness all around.
Reduce costs and protect profits Paying your international suppliers in local currency isn t as complicated as it sounds. The key is to compare whether it is more cost effective for you to pay in your own currency, or your foreign supplier s local currency. Follow this simple process to help protect your profits. Lock in that exchange rate with your FX provider Pay the invoice in foreign currency amount FX No Yes FX START Your international supplier sends you an invoice $ Does your invoice have a foreign currency amount? Yes Get quote from FX provider Yes for the foreign Is the converted No currency amount Is the invoice dual billed? amount lower than the domestic equivalent? * FX Pay the invoice in your local currency No Ask to be billed in your supplier s local currency? ie. does it have domestic and foreign costs to pick from? $
Risk management basics: keep your profits afloat When you send or receive payments in foreign currencies, exchange rate movements have the power to impact your costs and profits. Currency Risk Management is how your business prepares for and protects itself against these movements. If unmitigated, adverse currency movements can negatively impact your bottom line. Most businesses write-off the loss, taking a cut to their profits. Others pass the additional cost on to their clients, compromising their competitiveness and the relationship itself. If neither of these solutions sounds satisfactory, it s because they re not. There are more reliable ways of protecting your profits, costs, and relationships. One of the most effective is the use of financial products designed to hedge risk. A Forward Contract allows you to purchase currency at today s market rate for delivery at a future date. This means that no matter where the rate moves in the interim, your foreign costs are insulated.
Risk management applies to any accounting method The benefits of currency risk management are accessible to your business regardless of whether you use an accrual, cash or modified cash accounting method. Even when you re not waiting for funds to arrive from your client before paying your beneficiary, you can still be exposed to exchange rate movements from the time you pay your foreign business partner to when your client pays you. Locking in exchange rates with Forwards or Options Contracts ensures the amount you pay won t impact your profit margins downthe track. But what if currencies move in my favor? One of the realities of responsible risk management is that protecting your costs can occasionally mean missing opportunities to realize greater profits. But it also means the security of knowing no matter where the market goes, your profits are protected, and you re not gambling with your bottom line. What s more, you don t have to write off the difference between what you ve paid your supplier and your return on sales, so accounting is straightforward, and your audit trail is clear.! Think of it this way: If you aren t protecting your margins between billing by suppliers and payment from clients (or vice versa) you re effectively acting like a bank for your customers. You re taking on their risk and hoping the exchange rate doesn t move out of your favor. Takeaway: Currency risk management means that even if the currencies move in your favor, you haven t sustained a loss, and your profits are protected.
Risk management solutions cheat sheet Local Currency: Your international business partner s home currency. Paying in local currency, rather than dollars reduces costs for your recipient, may mean better pricing and fewer fees for your business. Risk Management: A term used to describe how a business prepares for, and protects itself, against potential exchange rate movements which could adversely impact costs and profits. Forward Contract: A financial tool that allows you to purchase a set amount of foreign currency, at a set exchange rate, for delivery at a specific date in the future. This helps eliminate exposure to rate fluctuation in the interim. Options Contract: Lock in an exchange rate to insure your business against negative shifts in currency movements, whilst maintaining the flexibility to benefit from any positive market shifts. Holding Balance: Some foreign exchange providers have the capacity to hold foreign currencies on your behalf so that you can receive or send international payments without taking on exposure. Effectively you convert funds to, or from, dollars every time you make an international transaction.
Put local currency payments into practice Now that you re ready to protect your profits with local currency payments, here s an overview of what to seek out when sourcing an international payment solution for your business. 1. Local payment options Pay foreign business partners in local currency easily and efficiently with a variety of disbursement options. It s important to reduce manual processes, and keep reporting simple and straightforward. Think about: wire, direct credit and draft payments capabilities access to foreign currencies and local clearing beneficiary storage and payables automation 2. Risk and cash management strategies Lower fees and better rates help you achieve cost-savings day-to-day; but effective risk and cash management services allow you to protect your profitability over the longer term. Consider these strategies: forward contracts market orders or rate bids foreign currency holding balances 3. Integration and automation systems Reducing data entry and manual processes doesn t just make life easier for your office staff. It also helps you avoid payment errors and delays, keeping beneficiaries happy. Some systems that could be implemented: accounting system integration customized reporting capabilities payment tracking and notifications Above all, look for a solution backed by professional, personalized client support from payment specialists.
Turn international payments into an advantage business.westernunion.com 2016 Western Union Holdings Inc. All rights reserved. Western Union Business Solutions is a division of The Western Union Company. Services in the US are provided by Custom House USA, LLC (NMLS ID: 906985) and Western Union Business Solutions (USA), LLC (NMLS ID: 907333) (collectively referred to as WUBS or Western Union Business Solutions ). For a complete listing of US state licensing, visit http://business.westernunion.com/about/notices/. For additional information about Custom House USA, LLC and Western Union Business Solutions USA, LLC visit http://business.westernunion.com/about/compliance-legal. This brochure does not create any binding obligation on any party, nor does this brochure constitute an offer or a solicitation of an order. Any such offer or solicitation will only be made, and the relationship between you and WUBS shall be governed by the applicable terms and conditions and any transaction-specific documentation entered into between you and WUBS. No representations, warranties or conditions of any kind, express or implied, are made herein. WUBS is the issuer of the products discussed herein and would be a counterparty to any transaction you undertake with WUBS. This brochure is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject WUBS or its affiliates to any registration or licensing requirement within such jurisdiction. WUBS is not registered with the Commodity Futures Trading Commission as a Commodity Trading Advisor, as a Swap Dealer, or in any other capacity. WUBS is not a member of the National Futures Association. Protections that would otherwise be available under the Commodity Exchange Act, the rules of the Commodity Futures Trading Commission, or the rules of the National Futures Association will not be available to you in connection with your relationship with or transactions with WUBS. Customers may be required to meet certain eligibility requirements in order to enter into foreign exchange transactions with WUBS. Claims regarding the products discussed and other information set out herein are general in nature and do not take into account your specific objectives, financial situation, or needs. This brochure does not constitute financial advice or a financial recommendation. You should use your independent judgment and consult with your own independent advisors in evaluating whether to enter into a transaction with WUBS. WUBS bases recommendations only on general industry knowledge and the client profile you have provided, and WUBS is not undertaking to assess the suitability of any recommendation for your particular hedging needs. WUBS has based the opinions expressed herein on information generally available to the public. WUBS makes no warranty concerning the accuracy of this information and specifically disclaims any liability whatsoever for any loss arising from hedging decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon. IP-160702