If your business pays overseas bills and suppliers in US dollars only, you may want to know about the hidden – and sometimes exorbitant — costs you’re paying on every international payment.
It’s common for businesses to pay internationally using the greenback exclusively. In fact, more than 49% of all cross-border transactions by volume are denominated in US dollars according to a 2015 currency usage patterns study by SWIFT. By comparison, the euro was used in 31% of transactions by volume while the pound was used in just 5%.
So what’s the problem of using dollars to pay your bills and suppliers abroad? You may be paying thousands of dollars in hidden (and avoidable) costs charged by your supplier while giving up control over your import costs at the same time.
What are these hidden costs involved with paying in US dollars and how can you avoid them? Let’s run through them here:
1. The supplier’s currency conversion markup cost
When you make payments to your suppliers overseas, they will need to convert the funds into their home currency as soon as they receive it. That currency conversion doesn’t come for free though, so suppliers will often pass the conversion costs onto you by adding it to your bill without actually listing it (hence why we call it “hidden”).
While detailed research on these conversion costs is difficult to find, an added cost of 2% to 3% of the transaction amount – that’s potentially $2,000 to $3,000 in cost for every $100,000 you send overseas – is a conservative estimate in our experience. Don’t worry, we’ll show you how to find out exactly how much you’re being charged in a moment.
2. The supplier’s currency-risk markup cost
In addition to the currency conversion markup, there’s another hidden cost that suppliers may charge you to protect their income from foreign exchange risk. Because foreign currency values change by the second for each political comment or Brexit-magnitude event, overseas suppliers will often charge an unlisted premium on your dollar-denominated invoice to compensate for potentially unfavorable changes in the currency exchange rates (think of it like insurance against currency trade losses).
3. The loss of control over your currency-related import costs
When you pay your overseas supplier in dollars, you’re giving up control over your import costs. Instead, by using an international payments provider to pay your overseas suppliers, you can better control your currency-related import costs and avoid potential foreign currency losses.
For example, let’s say I need to order €100,000 worth of wine from a French supplier, who will require payment in 90 days. With an effective currency strategy in mind, I could either a.) pay later in the period if I think the euro could be cheaper in the future (meaning my wine order would cost less in dollar terms), or b.) I could use a forward contract to lock in today’s exchange rates so I know exactly what I’ll be paying in dollar terms 90 days from now, thus avoiding potential losses if foreign currency prices move unfavorably.
How much are you paying your overseas supplier in hidden costs?
Here’s how to find out how much are you being charged by your overseas supplier to pay in US dollars. Simply ask the supplier (anonymously if possible) for two invoice quotes: one in US dollars and the other in the foreign currency used by the supplier. From there, convert the foreign currency price into US dollars. Finally, find the difference between the USD quote and the converted foreign currency quote and you’ll see how much in hidden charges you’d owe if you paid your supplier in US dollars.
CFO.com gave an example of how one US company found out how much it was paying in hidden charges. The US company asked its European vendor for the US dollar invoice (which showed $1 million as the price) and the foreign currency invoice (€705,000). With the euro costing $1.38 each at the time, the foreign currency invoice actually translated to $972,900. That means “the vendor had clearly built in a cushion of $27,100 (2.7%) into the product price” as CFO.com explained.
How to avoid the hidden costs and boost your profit margins
Fortunately, hidden costs are completely avoidable. By working with an international payments provider such as World First USA, Inc., the US company in the example above could have saved up to 50% on conversion costs to pay their overseas supplier – or around $13,500 in savings for just that one transaction.
How much could you save on international supplier payments? Call us at 737.209.4024 to get the conversation started or click to see how we can help boost your bottom line.
This article was originally featured on the World First USA blog.