Managing Your Business
How small business owners should pay foreign suppliers
No matter how small your business might be, you're still part of the global business world. Chances are you work with regular suppliers and vendors based both in and outside of the US.
For many business owners, paying for foreign transactions in US dollars is the default option. But since dealing in other currencies can offer substantial benefits for your suppliers, it's worth examining the logistics and costs involved in order to determine whether it's worth making the switch.
Here's what to consider in making your decision.
Your payment options
Often, small business owners send payments in US dollars simply because they've never made payments any other way. In some cases, of course, you may have a sound reason for paying with dollars. For example, if you work with multinational vendors, your vendors may already have a currency exchange program in place and have requested that payments be submitted in dollars. Or your industry supply chain may be entirely based on dollars, making it unnecessary to change.
When you make a payment in dollars, your bank withdraws the funds from your account. The money is then wired to your vendor's financial institution, which converts it to the local currency on their end. When you make a foreign currency payment, however, the funds aren't wired until your own bank completes the conversion and releases the payment.
If you're unsure whether paying in foreign currency is an option, start by talking to your banker about how your bank supports payments in multiple currencies. Then discuss the process of how you'd pay your vendors.
The potential for pricing power
Having flexible payment options can offer several advantages to business owners. For one, it allows you greater control and transparency over currency-related costs. If your vendor owns the exchange process, you may realize after-the-fact that you wound up with a poor exchange rate.
If you are making payments in a foreign currency, on the other hand, you get a full understanding of what the funds will cover, prior to making the payments.
Paying in a foreign currency may also give you greater leverage in negotiating. A survey from the Aite Group of mid-size importers found that six out of 10 respondents who pay in their suppliers' local currency received average discounts of 1-2 percent.
The impact of exchange rates
Currency conversion is expensive for suppliers, since most banks charge a conversion fee. It also means that the vendor assumes the risk that the value of their currency will decline against the dollar.
If you're only making a handful of payments to a vendor, you may be able to keep your current payment system intact. Most banking platforms allow you to select an option for foreign currency payments in lieu of US dollar payments, so you don't even have to click on a different screen.
With that said, major fluctuations in exchange rates can cause havoc with your profits. If you're doing a substantial amount of business abroad, you may want to consider offsetting the volatility of various currencies with various risk management instruments. Talk to your banker about the options to pay in foreign currency, and the best strategies available for your business needs.
Cybele Weisser is a Chase News contributor