Paying foreign suppliers: When are you better off using local currency vs. U.S. dollars?
You may be paying a premium and creating reconciliation headaches by making payments to international vendors in U.S. dollars. Keep these practical considerations in mind to help optimize foreign transactions.
Perhaps you've been paying your overseas vendors in U.S. dollars for decades and they've never complained. Your company may even require that international payments be denominated in U.S. dollars, a common treasury policy among American businesses buying from abroad. However, paying invoices in foreign currency could save you money and effort. The potential embedded costs of dealing in U.S. dollars are often overlooked and misconceptions abound over the risks of foreign currencies.
Of course, there are some instances when paying in U.S. dollars is efficient. Certain industries have dollar-functional supply chains where currency conversion shouldn’t occur. Multinational vendors may want U.S. dollars for their own operations, or they may have an arrangement to convert currencies via a foreign exchange hedging program. But if these considerations don't apply to your business, there may be benefits to changing your approach.
Here’s what to think about when deciding which invoice currency to use with overseas vendors.
Paying invoices in foreign currency can help improve cash flow
When you make a payment in U.S. 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-border payment, funds are not wired until they've been converted from dollars to the vendor’s currency. Your financial institution 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 working capital availability.
Paying in U.S. dollars can create challenges for vendors
Your vendor may experience faster payments and an easier account reconciliation process if you choose to pay in their local currency. When supplier payments are made in U.S. dollars, the vendor’s financial institution automatically converts the payment to the currency of the receiving account, often without contacting the recipient. This could create two challenges for your vendor’s accounts receivable (A/R) team:
- Delays in receipt of funds: Many banks take two business days to post cross-border payments to accounts, even for currencies that allow delivery on the same or next day after receipt. You may be able to deliver funds more quickly with no disadvantage to your company if you pay in the vendor’s local currency.
- Difficulty matching credits to invoices: Foreign reconciliation team may struggle to match your payment credit because the converted local currency amount won’t match the amount on the invoice. They can only hope the invoice reference details you provide in the wire transfer appear on the account statement.
Case study: Importing from China
A wholesale distributor based in the southeastern U.S. imported machine tools from China for more than 80 years and always paid in U.S. dollars. However, beginning in 2010, the internationalization 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.
- Vendor risk: You may be paying a risk premium when transacting in U.S. dollars because your vendor will account for possible currency fluctuations when quoting you a price in U.S. dollars. You can increase transparency by asking vendors to generate invoices that show prices in both U.S. dollars and the local currency. Consult with your banking provider to further discuss the benefits of dual-currency invoicing.
- Changes to accounts payable processing flow: Most banking platforms include the option for foreign currency payments in the same web client as U.S. dollar payments. The benefit of this is that the user experience likely won't change.
- Additional help: Payments to suppliers in a foreign currency shouldn't be confused with foreign exchange trading and hedging. More experienced treasury practitioners may choose to employ FX risk management instruments—such as forwards, swaps and options. These treasury teams will work closely with specialists on their bank’s FX desk to tailor appropriate solutions for their business.
How J.P. Morgan can help
Looking for ways to improve your vendor payments and handle invoice currency differently? Contact your banking relationship team to learn more about our cross border payment solutions and the international expertise that powers our people and products.
© 2022 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content.