HOW TO LOWER COSTS WITH LOCAL CURRENCY PAYMENTS
moving money for better
CASH MANAGEMENT
Foreign payments strategy for international business
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=costsIf you’re paying in dollars,
the extra costs can be invisible
Takeaway:
Paying in dollars can have its advantages, but it’s not without risk.
44%28%8%
$£ €The majority of international business payments are priced and settled in dollars.
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.
!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.
Remember:
local=efficientFunds are transmitted directly,
without additional intermediaries
Takeaway:
Paying in local currency removes risk and reduces costs by eliminating intermediaries. This means greater transparency, efficiency, and cost‑effectiveness all around.
START
Get quote from FX provider
for the foreign currency amount
Pay the invoice in your
local currency
Pay the invoice in foreign
currency amount
Your international supplier sends you an invoice
ie. does it have domestic and
foreign costs to pick from?
Does your invoice have a foreign
currency amount?
Is the invoice dual billed?
Is the converted amount lower
than the domestic equivalent?
Ask to be billed in your
supplier’s local currency
Yes Yes No
No
YesNo
Reduce costs and protect profits
$ ¥ £ €
$ ¥ £ €
Lock in that exchange rate
with your FX provider
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.
FX
*
?
FX
FX
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.
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.
!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.
Think of it this way: 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 applies to any accounting method
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.
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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.
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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
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