How Importing in Foreign Currencies Can Benefit Your Business
By: Michael Salerno, Vice President, International Banking
When it comes to importing goods, paying in U.S. dollars may seem like the best option for your business. However, using foreign currency can provide numerous benefits that are often overlooked.
By utilizing foreign currencies, you can take advantage of favorable exchange rates and avoid costs associated with currency conversion. Additionally, using foreign currencies when importing can provide greater transparency and reduce the risk of unexpected costs.
Many companies are hesitant to pay for imports using foreign currencies because they lack an understanding of the foreign exchange market, including how to manage fluctuations in exchange rates and how to hedge that risk. Additionally, there may be differences in payment standards and methods from one country to another that can add unexpected costs.
For example, some areas of the world do not have access to a foreign correspondent banking network. A foreign correspondent bank is a financial institution in a foreign country that has authority to process transactions on behalf of your bank. In areas where correspondent networks are not established, processing fees can be much higher.
Similarly, if a business banks with a financial institution that does not have SWIFT capabilities, it may also face challenges. SWIFT messages communicate data securely between financial institutions. Since the messaging format also helps to effectively exchange details about the transaction, processing payments through a non-SWIFT bank can be costlier and more susceptible to fraud.
To avoid the uncertainty of the foreign exchange market, many businesses choose to pay for imports in their local currency. After all, it’s familiar, and companies easily understand how much they will need to pay to import goods. However, if you bank with a financial institution that is part of a strong correspondent network and is SWIFT enabled, buying in foreign currency can put your business at an advantage.
Importing in foreign currency could provide your business with a number of benefits. The first involves exchange rates.
When exchange rates are favorable, meaning the U.S. dollar is worth more than the foreign currency, you could net your company significant savings by making payment in foreign funds. In essence, you will pay a lower price for the goods you import.
By purchasing in foreign funds, your business can also avoid the costs associated with your vendor converting U.S. dollars into foreign currencies. Businesses in other countries often build in a premium when pricing in U.S. dollars. The added cost is designed to offset the fees associated with converting funds as well as additional processing expenses required to accept payment. By paying in the exporter’s local currency, you can avoid these additional charges and may be able to negotiate better prices with suppliers.
Overall, importers of goods could save 10% or more by taking advantage of favorable exchange rates and receive better payment terms, but what about those challenges we mentioned early on? How does a business make sense of exchange rates and avoid unnecessary risk?
Fortunately, there are a number of tools your company can use to simplify the process of importing goods using foreign currencies. The first is a dual-currency invoice.
A dual currency invoice helps importers gain a clearer picture of the cost of goods by providing the export price in both U.S. dollars and the local currency. Prices are determined using the current exchange rate.
However, dual invoices often carry the stipulation that the final pricing will be based on the exchange rate in effect when the agreement is finalized. This means, your actual pricing could rise or fall, depending on market conditions.
To manage future cash flow payables exposure, you can use tools such as forward contracts. A forward contract allows you as the buyer to lock an exchange rate now and utilize the contract as invoices come due.
Forward contracts reduce the risk of disadvantageous market moves by providing a more certain determination of the buying price, allowing businesses to better predict and manage cash flows. Buyers may hedge the entire amount up front, when timing and amounts are known, or lock in on a certain percentage of the anticipated cash flow and then layer on additional currency purchases as they become certain.
For importers, purchasing in foreign currencies can provide several advantages that could boost the bottom line. The key is using available tools to reduce risk, improve transaction efficiency and help thwart fraud. By working with your bank, you can select the right tools for foreign currency imports and achieve your goals.
Learn how FNBO can support your international transactions or contact our Global Banking team today.
About the Author
Mike Salerno joined the bank in 2002 and currently leads the Global Banking team, which includes business development, international payments, foreign exchange management and trade finance solutions for corporate and correspondent banking customers. International issues can present challenges for organizations, and Mike enjoys creating simple and transparent solutions that reduce the complexity of doing business internationally.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.