The value of any country’s currency can fluctuate based on any number of factors over which its businesses may have no control. Many U.S. companies that buy materials and finished products from foreign suppliers prefer to pay for them in U.S. dollars (USD) rather than the supplier’s currency.
This may seem easier for everyone in the U.S.-based business – particularly if they do business with suppliers in multiple countries. Further, the USD has historically been relatively stable. However, there are some advantages to paying in a foreign supplier’s currency.
More favorable terms may be available for making the switch
If you’re considering making that change, it’s crucial, of course, to talk with the supplier and possibly negotiate some added favorable terms before finalizing or amending the contract language. For example, a foreign supplier might offer discounts, extended payment plans and other perks in return for payment in their country’s currency and not having to assume the foreign exchange (FX) risk.
One bank executive notes that paying in a foreign supplier’s currency “isn’t so complicated, and it can have benefits. After all, you’re offering a convenience to your foreign supplier. There can be value in that.” It can also help build a more positive relationship.
Protecting your company against unexpected fluctuations
Of course, it’s also critical to look at the strength and stability of that country’s currency in comparison to the USD to determine whether it’s in the U.S. company’s financial interests. There are strategies that help businesses hedge their risk in case of a significant rate fluctuation. As the bank executive notes, “FX hedging provides the buyer with certainty regarding the amount of the payment and also provides fixed settlement terms.”
Changing the currency in which you do business with a foreign supplier, of course, means revising contracts. It’s a significant change in the terms of the relationship. Having experienced legal guidance in negotiating the contract is key to helping avoid litigation in the future.