Paying suppliers: Is it better to pay in local currency?

As you embark on sourcing from foreign suppliers, a key financial consideration emerges: should you pay in local currency or GBP? While the majority opt to pay in their home currency or USD, in this article we'll explore when you should consider paying in your suppliers' currency, no matter how exotic it may seem, and how to begin if you don't have an experienced finance team or FX consultants to support you.

Benefits of paying in local currency

Paying suppliers in their local currency can offer several advantages:

Lower costs

When suppliers invoice you in a foreign currency, such as USD or GBP, rather than their local currency, they often incorporate a premium into their prices. This premium compensates for the currency conversion risk they bear and the incoming transaction fees they incur, and is often based on the unfavourable conversion rates that their local banks are providing them.

Lower transaction fees

Transactions in local currency can be routed via domestic payment channels, if available to your bank or payment provider. These are typically much cheaper and quicker than standard international SWIFT payments.

Extended payment terms

By paying in the local currency, you eliminate the currency exchange risk for the supplier. This risk includes potential losses from fluctuating exchange rates between the time an invoice is issued and when payment is received. Without this uncertainty, suppliers might be more inclined to offer extended payment deadlines, because they will receive a guaranteed amount in their currency. This can significantly improve your business's cash flow by allowing you more flexibility in managing your funds before making payments.

Stronger supplier relationships

Choosing to pay in a supplier's local currency demonstrates respect and understanding of their operational context, which can strengthen business relationships and foster loyalty.

Challenges of paying in local currency

While there are benefits, businesses must also navigate several challenges:

Foreign exchange risk

Businesses are exposed to the risk that the exchange rate between their home currency and the supplier's local currency could move unfavourably. This could increase costs unexpectedly if the home currency depreciates against the supplier's currency.

What we recommend: Try to negotiate dual-currency invoicing. This means your supplier invoices are set up in both your home currency and the currency of your vendor. This way you can use the currency that is more favourable to you at the time of payment. At MultiPass you can easily pay in over 70 currencies from a single account, all exchanged at bank-beating rates.

Administrative complexity

The company must track exchange rates, reconcile transactions in different currencies and often different banks, and ensure accurate reporting for financial statements and tax purposes, requiring more sophisticated accounting practices.

What we recommend: Choose a single digital payment provider for all your multi-currency payment needs. With MultiPass, you can easily access your payment history and statements, historical exchange rates and more – either in a single view or separated by different currencies, and keep your finances in one place.

Banking infrastructure

Businesses, especially small or medium-sized enterprises, might find their local bank's currency offerings limited or costly, complicating the process of paying overseas suppliers. At the same time, opening and maintaining several bank accounts in their markets of interest is a lengthy and complicated process that requires travelling and visiting bank branches, often taking months.

What we recommend: Open a digital account for managing multiple currencies in one place. This way, you'll be ready to engage suppliers in new markets without the need for opening new accounts. E-money institutions have more relaxed rules for customer onboarding, allowing them to open accounts remotely and generally much quicker than with traditional banks. You can open an account with MultiPass from any location in the world in just days.

Who should consider paying in a local currency?

Although this can be a good strategy for any business making frequent cross-border payments, there are particular cases and industries where it is essential.

• Small businesses without dedicated financial teams. SMEs, while potentially more sensitive to the administrative aspects of managing multiple currencies, can significantly benefit from the potential cost savings and stronger supplier relationships that paying in local currency can offer.
• Businesses in industries with thin margins (e.g., retail, travel, dropshipping and others) need to be particularly vigilant about currency choices, as even small shifts in exchange rates can significantly impact the whole business deal's profitability.
• Businesses heavily reliant on imported goods or raw materials should consider their currency strategy early to manage costs effectively.
• Companies that have long-term contracts with foreign suppliers may benefit from paying in the local currency to lock in prices and reduce the risk of currency fluctuations affecting the cost of future foreign transactions.
• Businesses in countries experiencing high volatility in their home currency may find it financially prudent to pay in their supplier's local currency, especially if they choose to keep a separate balance in the stronger, more stable currency. This strategy can provide a more predictable cost base for imported goods and services.

Read this article where we address how a 7% decrease in the yuan's value against the dollar has affected supplier strategies in 2023.

Simplify your payments with MultiPass

With our platform, you can make and receive payments in over 70 currencies across 200 countries and regions, enabling you to reach suppliers from Hong Kong to New Zealand or Mexico effortlessly. Moreover, you can benefit from local account details to accept payments from the UK, US, and EU as if you were a local company.

We are committed to providing personalised support through a dedicated Personal Manager. Whether you are an existing client or interested in exploring our services,we are always reachable by phone, email, chat, or messenger – whatever means you prefer. Begin your journey with MultiPass today and transform how you manage your international payments.

FAQ

Is it always cheaper to pay in local currency?

Not necessarily. While it can offer cost savings, factors like exchange rate fluctuations can affect the actual costs.

How can businesses protect themselves against currency fluctuation risks?

Hedging through financial instruments and maintaining flexibility in payment terms are some of the most common strategies.