It’s a traditional approach to pay foreign suppliers in USD. Maybe you’ve always done it this way, and to your knowledge, it works out just fine. 

Re-evaluating your payment methods could really pay off.

If you’re paying global vendors in U.S. dollars, you are most likely paying too much for imports, have hidden currency risks, and are not taking advantage of better liquidity management. Here’s why:

Paying Too Much

There are several reasons why the base USD value starts out inflated, one of them being that your global vendor makes the calculation using their banks’ poor foreign exchange (FX) rate.

Why are they having to calculate a dollar value in the first place? It’s because they want to convert to their home currency but are offering you dollars because that’s likely what you asked them to quote you in. Banks mark their FX rates up significantly, hence the already over inflated base dollar value.

In addition, since your vendor will be paid in the future, they are unaware of what the FX rate will be when they come to convert to their currency. This causes them to ‘pad’ the dollar amount to manage the risk which is to say they increase the dollar value by 4-7% (just in case the dollar weakens and your vendor converts to a lesser amount in their currency). 

Currency Exchange Risk

A weakening dollar will result in your U.S. dollar invoice value increasing each month because your vendor is basing the initial dollar calculation against their fixed home currency value. Example:

Month 1 vendor wants to sell at €100,000 and the FX rate is 1.05 = $105,000 starting price + padding.

Month 2 vendor wants to sell at €100,000 and the FX rate is 1.06 = $106,000 starting price + padding.

Month 3 vendor wants to sell at €100,000 and the FX rate is 1.08 = $108,000 starting price + padding.

You therefore have a risk against currency fluctuations but you can’t manage it when paying in dollars.

Poor Liquidity Management

When a vendor is going to be paid in dollars they do not want to extend payment terms too far into the ‘unknown’ future and therefore it’s likely they are tight with what they offer you. i.e. payment in advance up to maybe 30 days.

The longer the payment terms when paying in dollars, the higher the padded %age.

Take the FX volatility from them, and pay them in their currency which increases the chance of extending payment terms by an additional 30-60 days.

Actions

That is why GreenShootsFX highly recommends you request a dual quote.

Take the extra 20 seconds to ask for a currency quote when asking for a price in dollars.

Pay whichever is the lower.

When paying in currency FIX the exchange rate today for delivery that matches payment terms.

Result of Paying Vendors in their Currency

• Lowers your dollar value by 4 – 7% and in some cases as much as 10%.
• You can now hedge against currency fluctuations, lowering your risk, and the amount paid on future invoices.
• Improve liquidity by extending the payment terms offered to you.
• Improve relations with your vendors.
• Increase your net profit.

We estimate this might take a total of 4 to 6 minutes in total time throughout the whole process, and might add 50 additional single key strokes.

It’s not as confusing, complicated, or time consuming as you’ve been led to believe.

Take 15 minutes out of your day to save 5% on your global purchases.