Perhaps you've been paying your overseas vendors in US dollars for decades, and they've never complained. Your company may even require international payments be denominated in US dollars, a common treasury policy among US businesses buying from abroad. However, it’s worthwhile to reexamine policies like this—the costs of dealing in dollars are often overlooked, and misconceptions abound over the risks of foreign currencies.
Of course there are some instances when paying in US dollars is best. Certain industries have dollar-functional supply chains where currency conversion should not occur. Multinational vendors may want dollars for their own operations, or they may have an arrangement to convert currencies in bulk using preferred exchange rates. But if these considerations don't apply to your business, there can be significant benefits to changing your approach.
Here’s what you should know when deciding which currency to use with overseas vendors.
The major benefit of paying in local currency is improved cash flow. When you make a payment in US dollars, your bank immediately withdraws the funds from your account. This ensures the dollars are sent to the vendor’s bank right away. By contrast, when you make a cross-currency payment, funds are not wired until they've been converted from dollars to the vendor’s currency. Your bank may be willing to delay withdrawing the dollars from your account until the conversion is complete, which could take up to two business days. Two days of funds availability can be meaningful in terms of earnings credit and cash flow availability.
Your vendor could expect prompter payments and an easier account reconciliation process if you choose to pay in its local currency. The reason for this is that when you make a foreign payment in US dollars, the vendor’s bank automatically converts it to the currency of the receiving account, often without contacting the recipient. This creates two likely challenges for your vendor’s accounts receivable (A/R) team:
A wholesale distributor based in the southeastern US imported machine tools from China for more than 80 years and always paid in US dollars. However, beginning in 2010, the liberalization of the Chinese currency allowed for the distributor to make payments in CNH, the Chinese currency traded outside of mainland China. By agreeing to pay in CNH, the wholesale distributor was able to negotiate more favorable pricing from their vendor.
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