For donkey’s years, most American enterprises have naturally leaned towards transacting global business in U.S. dollars. The greenback’s prominence as the world’s reserve currency makes this feasible, with about 55% of banks’ cross-border flows denominated in dollars, according to this [International Monetary Fund report](https://www.imf.org). Yet, feasible doesn’t always imply optimal, does it?
Within the intricacies of supply chains, it stands to reason some transactions are best conducted in foreign currencies. Many U.S. business leaders realise the benefits of such deals but may shy away, believing dollars minimise risk. However, clinging to dollars can paradoxically introduce its own brand of business risk, along with additional cost. More executives—spanning manufacturing, importing, and other industries—are catching on to these potential pitfalls.
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Receiving invoices
Foreign suppliers might kindly invoice you in dollars, but beware the hidden costs. They might use the daily exchange rate to pad margins, shielding themselves from currency fluctuations. It results in a convenience premium for the U.S. firm. Alternatively, they might possess a savvy forex programme yet offer you a less than favourable rate.
To sidestep these traps, U.S. firms should request invoices in both dollars and the supplier’s local currency. A partnership with a financial institution offering FX advisory can help trim hidden supply-chain costs. Often, it’s best to pay in the local currency and use a forward contract to fix the exchange rate throughout the payable period.
Issuing invoices
As American firms venture beyond borders, they must be mindful of FX dynamics. In competitive bids, offering a price in dollars and the potential client’s local currency displays goodwill, enhancing the firm’s prospects. Issuing invoices in foreign currencies should involve counsel from an institution well-versed in managing this gambit’s risks.
Establishing Foreign Currency Accounts (FCAs)
As cross-border dealings escalate, U.S. companies might find it advantageous to maintain foreign currency accounts in pertinent currencies. These accounts are especially helpful for handling foreign subsidiaries or paying international employees. Depending on transaction volumes, some hedging might be warranted.
Additional suggestions
Here are a few pointers from our experience working with clients:
- Ensure your bank is part of the [SWIFT network](https://swift.com). Though many are aware of SWIFT for cross-border banking, its role in handling international communications is crucial.
- Procuring a cross-border [letter of credit](https://www.investopedia.com/terms/l/letterofcredit.asp) from a supportive financial institution is worthwhile. It’s best if they can issue letters in both foreign currency and dollars.
- Access to bankers skilled in cross-border trade and forex is essential for transaction structuring and risk management.
Attending to these areas helps U.S. firms curb hidden expenses and foster healthier relationships with international partners, addressing both business and financial risks along the way.
Shawn Walters is Senior Vice President of Global Banking Services at [UMB Bank](https://www.umb.com), Capital Markets Division.
