In our interconnected world, it’s easier than ever to buy, sell and trade goods and services.
Despite the fact that doing business globally is no longer as complicated as it once was, importers and exporters sometimes miss out on opportunities to increase their profit margins because of fear or lack of knowledge regarding how to handle buyers or sellers in other countries—especially with regard to using multiple currencies.
We asked Andrew Woelflein, Chief Strategy Officer at Tempus, to explain how currency exchange services can benefit both importers and exporters.
1. Currency exchange services can help importers and exporters eliminate profit loss by using forward contracts.
Through currency exchange services, both importers and exporters can use forward contracts to buy or sell currency for a future delivery date, which eliminates the risk of the currency moving against them and eating into their profit margin. By employing a forward contract in your invoicing, you have “insurance” against the possibility of losing money due to exchange-rate volatility. We discuss how forward contracts work in detail in our article, Exporters Should Consider Quoting and Invoicing in Alternate Currencies.
2. Currency exchange services help U.S. importers avoid overpaying foreign sellers.
Often, American importers tell us they don’t use foreign currency. They instead just send U.S. dollars overseas for every transaction. Overseas companies that accept U.S. dollars take on risk by accepting this currency, because they have to then convert U.S. dollars into their currency. To hedge this risk, these foreign companies often mark up the dollar invoice anywhere from three to five percent or more.
To counteract this, U.S. importers should insist on dual invoicing—having foreign suppliers invoice them in both U.S. dollars and their local currency. With dual invoicing, importers can compare the two invoices against the exchange rate and make a decision on which currency to send. (Usually it is cheaper to send foreign currency than to send dollars.)
Sometimes foreign exporters refuse to send a dual invoice because they’ve marked up the dollar so high that they’re now profiting from the exchange rate themselves. If you’re working with an exporter who hesitates to provide a dual invoice, that is a sign you’re almost certainly being overcharged. You should insist they provide what you’ve requested.
For U.S. exporters, dual invoicing does not cost extra, and it is simple to do. Shipping Solutions Professional export documentation and compliance software makes it easy to create proforma and commercial invoices in any currency of the world, including the option to list the total value of the invoice in both U.S. dollars and an alternate currency, while at the same time using U.S. dollars for your electronic export information (EEI) filings through AESDirect on the ACE portal. You can see how it works here!
3. Currency exchange services provide tools that may protect your company when currencies fluctuate.
Currencies are always fluctuating—moving up and down and strengthening or weakening against each other. Importers and exporters can take advantage of these fluctuations—currency strengthening when they need to buy it or weakening when they need to sell it.
Take the Euro for example. If you want to buy Euros only at $1.09, even though the price today is $1.11, you can place a market order with a currency exchange provider. When (and if) the market gets to that rate—whether it’s in a day, a week, or a month—that currency will be purchased on your behalf.
Market orders allow exporters and importers to take advantage of currency strengthening in their favor, but they similarly protect themselves if the currency weakens.
Using our earlier example of dollars to Euros, to protect themselves against an ever-weakening dollar, importers may buy at $1.12 or $1.13, so that in case the dollar goes to $1.20, they won’t be in a worst-case scenario. At the price of $1.13, they know from their business and profit margin that they’ll still make profit on the product they've imported and plan to sell; but if it reached $1.20, their profit margin would be deeply eroded.
4. You get a strategic partner to help you make informed decisions about your business’ currency needs.
For many, being an importer or exporter means wearing the CFO hat as well and being in charge of protecting your company from financial risk. But in the world of international trade, it’s difficult to get a full picture of the economic landscape due to increasingly complicated political climates, trade wars, natural disasters, and economic crises in foreign governments. The Influence of these factors on currencies is almost entirely unpredictable. This is why it’s a huge advantage to have a partner who understands the world of exchange.
Currency exchange specialists help importers and exporters form strategies tailored to their individual needs. It’s invaluable to have someone on your side who can guide you through the intricacies of everything from forwards, to market orders, to holding foreign currency, because the timing of when you buy or sell currency has a huge impact on your profitability.
- Free Webinar: Why You Should Start Invoicing in Foreign Currencies
- Using Multiple Currencies on Your Export Invoices