The hidden benefits of foreign exchange.

It’s unfortunate, but many American companies engaging in international trade overlook the advantages of using foreign currency. Business owners shy away from foreign exchange because they’re unfamiliar with its mechanics or uncertain about how it could positively impact their bottom line. However, incorporating foreign exchange into your financial strategy can offer significant benefits. If your business is selling products or services overseas, leveraging foreign exchange can be a game-changer. Here are a few scenarios that show how foreign exchange can boost your business.

Scenario #1: Pricing products and services in U.S. dollars.

If you price your offerings in U.S. dollars when selling abroad, you may unintentionally limit your sales. Just as many Americans prefer not to deal with foreign currencies, international customers might be hesitant to transact in U.S. dollars. They may find it inconvenient, leading them to seek alternatives from local competitors. Additionally, currency fluctuations between the U.S. dollar and their local currency could result in prices that are either too high or too low for the market. By pricing your products in the local currency, you can increase customer satisfaction, potentially increasing both sales and profitability.

Scenario #2: Getting invoiced in U.S. dollars by foreign suppliers.

When you receive invoices in U.S. dollars for goods and services from foreign suppliers, you might end up paying more than necessary. Some suppliers adjust the exchange rate in their favor when converting prices to U.S. dollars, effectively inflating the cost. By opting to get invoiced in the supplier’s local currency and working with your bank to handle the conversion, you could lower your expenses and improve your profit margins.

Scenario #3: Hesitation to wire funds in foreign currency.

Wiring funds in a foreign currency can seem daunting, but it’s simpler than you might think. For outgoing wires, a bank applies the current exchange rate to calculate the equivalent amount in U.S. dollars, then sends the payment in the foreign currency. For incoming wires, the process works in reverse: your customer pays in their local currency, and your bank credits your account with the equivalent amount in U.S. dollars.

Scenario #4: Preferring drafts over wires for foreign payments.

While some businesses prefer to make foreign payments by draft, wiring funds is normally faster and more reliable. A wire transfer typically only takes a day or two, whereas a draft can take weeks to reach its destination. Moreover, an incoming draft in a foreign currency often must be cleared in its country of origin, which can be a cumbersome, time-consuming and expensive process. In reality, all payments made by draft are eventually settled with a wire transfer anyway, so starting with a wire can save you considerable time and effort.

Scenario #5: Reluctance to open a foreign currency account.

If your business frequently sends or receives payments in a specific foreign currency, opening a foreign currency account can save you money. While it’s possible to conduct transactions in foreign currency without such an account, holding foreign funds in their original currency allows you to avoid repeated currency conversions. This means you can pay foreign suppliers directly from your foreign currency account, eliminating unnecessary exchange fees and better managing your cash flow.

Scenario #6: Concern over the unpredictability of exchange rates.

Exchange rates are volatile, sometimes shifting by 2–3% in a single day. However, you can mitigate this risk with tools like FX Forwards. An FX Forward allows you to lock in today’s exchange rate for a future transaction, protecting your business from potential adverse movements in currency values. For instance, if a European customer agrees to pay you 100,000 euros in three months, an FX Forward lets you lock in the exchange rate now, ensuring you receive a predictable amount in U.S. dollars when payment is made. While FX Forwards have some regulatory restrictions, they can be a valuable tool for both exporters and importers.

Conclusion.

While foreign exchange might seem complicated at first, it can significantly enhance your bottom line if your business operates internationally. Don’t let unfamiliarity with this process hold your business back. To explore how foreign exchange can benefit your business, please visit our Commerce Bank Foreign exchange solutions website or fill out a Commerce Bank Foreign exchange solutions contact form and we’ll be in touch.