If you have global suppliers, do you pay them in U.S. dollars or their local currency? Do you even think about it twice? Why should that even matter? While every business is different and there’s no one-size-fits-all answer, there are good reasons why you should consider making payments in your vendor’s local currency.
Payment timing is one of the most notable reasons for paying in your vendor’s local currency. As explained in this article by J.P. Morgan Chase, when you pay a foreign vendor in U.S. dollars, funds need to be converted, and that usually occurs at the foreign vendor’s bank. With another institution converting the funds it can involve delays and take longer to land in your vendor’s bank account. “Where’s my payment?” is a common question all AP managers often hear, and when you pay in a local currency, you’re likely to hear that less often.
There may also be “hidden fees.” When the payment is sent to the vendor’s bank, the bank converts the funds to the local currency and sometimes there’s an extra conversion charge tacked on. Everyone hates unnecessary extra fees.
Another tricky issue is managing currency exchange rates versus the U.S. dollar. When you pay in U.S. dollars, the value of the payment between when a payment is approved and when it lands in the vendor’s bank account can be different due to the ever-fluctuating value of currencies versus the dollar. To guard against currency value swings, international vendors sometimes “pad” quotes in their favor to help guarantee that they receive the value they believe they are owed. If you pay in the local currency, you can ensure your vendor is paid exactly the amount he or she desires for services or products delivered.
Another situation to consider is what happens if there’s an AP error. As careful as you may be, mistakes will inevitably happen. Correcting errors in cross-border payments isn’t just complicated and time-consuming, it can also end up costing you more money. By paying foreign vendors in their local currency, you eliminate the need to convert currencies from the equation. In these cases, unfortunate payment errors won’t be as costly.
Your vendors will have an easier time reconciling payments, reducing questions and concerns coming to you. For example, it is much easier for them to match up a €100 to an exact €100 payment versus $116.35, which is the exchange rate at the time of writing.
Of course, certain currencies are directly tied to the U.S. dollar. The decision of which currency to use for payment has less of an impact in these cases, because potential fluctuations in exchange rates pose less of a risk and vendors will feel less of a need to hedge against them in their pricing.
In many instances though, making international business payments in a vendor’s local currency can lead to cost savings in the long run. It’s worth it to take a closer look at your international payment processes to see if there’s any potential cutting your costs and reducing unnecessary delays or complexity.
How Bill.com can help you in paying your vendors in local currency?
Within Bill.com, small business customers can send payments to their overseas vendors in the local currency of the vendor. Bill.com provides the exchange rate upfront and provides the full amount that the vendor will receive in their currency.
Whether you pay your vendors in U.S. dollars or their local currency, Bill.com makes doing global business much easier. International payments have the same approval workflows as domestic payments. There’s clear payment status tracking and payment notifications for your international vendors. Bill.com iOS and Android apps support paying your global vendors. Even better, Bill.com International Business Payments is integrated with accounting software. It automatically calculates and applies currency conversion rates and syncs with your accounting software, making reconciliation much more efficient.