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Sending payments in local currencies can help companies that work with clients and vendors overseas better manage their cash flow, and accurately project the value of their foreign accounts receivables and payables more easily, says Michael Hayashida, senior managing director and head of global foreign exchange risk management at East West Bank.
A company that gets invoiced in U.S. dollars for products bought in another country may think they are making their lives easier by avoiding currency risk. However, there is a hidden cost for that convenience of paying in U.S. dollars: foreign vendors would then have to convert the U.S. dollar payment back into their local currency—often incurring exorbitant conversion and transaction fees in the process, which then typically gets passed back to the company. Using local currencies to pay a foreign invoice can help a company avoid paying higher exchange rates and other fees, says Hayashida.
“Foreign suppliers usually want to pass on any incurred cost to their U.S. customers; therefore, a U.S.-based company keeping all their cash flow only in U.S. dollar may not always be best,” Hayashida says. “Nine times out of 10, the foreign supplier builds in a ‘conversion risk cushion’ into their prices, so the U.S. company ends up paying more than they have to.”
Conversion rates are not always in favor of American customers who keep their money in USD, he says. When purchasing managers need to make an international payment—especially when sourcing goods from major economies such as Germany, Japan, or China—dealing in the respective local currency is often a better strategy.
To combat those risks, companies should look into foreign exchange rate and currency risk management solutions. “Our goal is to help remove the variable of foreign exchange from the equation, so to speak, in order that the U.S. customer can ultimately decide if it is more advantageous to pay in the U.S. dollar or the local currency,” explains Hayashida.
For several years, Kenny Huang, CEO of JBK in Alhambra, California, has paid his vendors in local currencies, since the company imports anime character goods such as plush dolls, figures and statues, keychains, and other items from Japan.
“We don't sell much out of the States, but 30% of our business equates to items imported from Japan,” Huang says.
The company mainly conducts transfers to the Japanese yen (JPY) currently to pay its suppliers. The experience of paying in a local currency has been advantageous and does not have any downfalls, Huang says.
The company also has a Japanese yen account and is able to buy JPY when the “rates are good and store it in the JPY account until we're ready to send,” Huang says. “The international wires help me pay my vendors in Japan. I also love the freedom of having a large window of time to buy the Japanese yen, giving us more time to watch the foreign exchange rate.”
“We are very pleased with our dealings with East West Bank,” Huang shares. “I like the fact that I can call a number, and someone I'm familiar with picks up and can accommodate me almost immediately. I also receive call backs from local branches indicating that my wires have been received and processed.”
On the flip side, some companies will send out invoices in two currencies, giving customers the option to pay in either one.
“This ‘dual currency invoice’ methodology is the best practice with respect to dealing with foreign suppliers,” Hayashida says. “Customers can see both amounts, and this puts the customer in a position of control, depending on what is going on in each market.”
Depending on how strong the U.S. dollar is compared to another country’s currency, customers have several options and can decide which route is appropriate to take. Sometimes it makes more sense to pay in USD. In other scenarios, if there is a spike in the U.S. dollar, then it makes more sense for the customer to convert the payment into another currency.
“By dealing in the local currency, the customer will get treated like a local customer and not have to pay any extraneous or hidden surcharges. The customer gets more bang for their buck,” Hayashida says.
Rising and continued inflationary pressures worldwide have recently led investors to take refuge in the U.S. dollar. The dollar has remained strong and is being viewed as a “safe haven” asset for many investors. However, in nine out of 10 situations, companies are better off dealing in local currencies, says Hayashida.
“When companies look deeper and understand market dynamics, dealing in the local currency often makes a lot more sense,” Hayashida explains.
While there is some rational basis in certain situations for wanting to deal with payments in the U.S. dollar—especially for various commodities that tend to be “USD-based”—there is technically no stipulation that you must pay with it, he says.
Some companies view using the U.S. dollar as an opportunity and take advantage of razor thin margins. Others are used to conducting payments domestically and do not have the knowledge or the guidance of how currency transactions occur and could easily be taken advantage of, he adds.
“We are trying to bring awareness to the foreign exchange product and the various associated currency risk management solutions, so that small to medium-sized businesses can ultimately receive the same level of service that is usually reserved only for large corporations,” Hayashida says.
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