August 23, 2017
Foreign Exchange: Embrace it and profit.
Scenario #1: You price the products and services you sell abroad in U.S. dollars.If you take this approach, you might be limiting sales without knowing it. Just as Americans are hesitant to use a foreign currency, a foreign customer may be hesitant to use U.S. dollars. Customers who feel inconvenienced by paying in U.S. dollars rather than their local currency may look elsewhere. The fluctuation between the dollar and the local currency may also result in pricing that is either too high or too low for the market. By pricing your products in the local currency, you can avoid these outcomes and possibly increase sales and profits.
Scenario #2: You are invoiced in U.S. dollars for the products and services you buy from foreign companies.In this scenario, you might be paying more than you should. Some suppliers “pad” the exchange rate when determining the U.S. price equivalent. You may ultimately pay less if you're invoiced in your customers' local currency and work with your bank to exchange it into U.S. dollars.
Scenario #3: You are hesitant to wire funds in another currency.Assuming your bank has the capability and your banker knows the process, wiring funds in foreign currencies is relatively simple. For an outgoing wire, your bank simply applies an exchange rate to determine how many U.S. dollars you owe and then sends the wire in the currency you choose. For an incoming wire, your customer pays in their local currency, and your bank credits your account with the equivalent amount in U.S. dollars. If you complete several outgoing international wires in a month, your bank may simplify the process further and make it possible to complete them online.
Scenario #4: You'd rather make foreign payments by draft.Although many banks can provide a draft in a foreign currency, wires are typically the preferred method of payment. It takes two days or less to send a wire, compared to the weeks it can take for a foreign currency draft to reach its destination through the mail. On top of that, an incoming draft paid in a foreign currency must be returned to its country of origin to be cleared - a cumbersome and time-consuming process. In fact, all payments made with a draft are ultimately completed with a wire. Therefore, using a wire from the beginning can save you time.
Scenario #5: You'd rather not open a foreign currency account.If your business regularly sends and receives payments in a particular foreign currency, you could be saving money with a foreign currency account. While it's possible to send and receive payments in foreign currency without one, such an account could help you save on the exchange rate. If you’re paid in a foreign currency and deposit it to your account, you can later use it to make a payment to a foreign seller. By holding it in the account instead of exchanging it to U.S. dollars and back to the currency, you don’t have to pay to exchange it.
Scenario #6: You worry about the unpredictability of exchange rates.It's true: exchange rates fluctuate constantly, sometimes by two or three percent in a day. Exchange rates also vary by bank and transaction size. But there is a way to eliminate the risk of rate fluctuations. With an FX Forward, you can fix the exchange rate today for any currency you wish to buy or sell in the future. An FX Forward is an agreement you enter into with your bank to lock in today’s exchange rate for future foreign currency transactions.
For example, if a European customer purchased your product today for 100,000 euros, you might give them three months to pay. With an FX Forward, when your customer’s euro payment is received in three months, the bank would credit your account with the U.S. dollar equivalent based on today’s exchange rate. In other words, you freeze the exchange rate on a foreign currency transaction until an agreed upon date when payment is received. This example shows how exporters can use an FX Forward, but importers can use also use it in a similar fashion.
FX Forwards do come with some restrictions: for example, after Dodd-Frank, they can only be used by corporations that meet certain criteria. Check with your bank to see what limitations might apply.
While it may seem complicated at first, foreign exchange can help your bottom line if you conduct business outside the U.S. To start learning about how foreign exchange can help your business, find a bank with foreign exchange capabilities and begin building a relationship. An experienced banker that knows your business and its challenges can help find the foreign exchange solutions that are best for you.
- Thinking about exporting? Here's how to get started.
- Trade Matters: What you should know about doing business internationally.