The Best Way to Pay Overseas Suppliers from Canada

Last Updated: 26 Sep 2023

When settling payments with international suppliers, many Canadian businesses automatically resort to using U.S. dollars. However, choosing to pay in a supplier's currency can offer several often-overlooked advantages.

Discover the best method for Canadian firms to pay international suppliers and increase savings upto 3-5% by opting for foreign currencies, companies can leverage favorable exchange rates, sidestep fees linked to currency conversion, and enhance transparency in their transactions. This blog delves into the hurdles of settling overseas bills, the advantages of transacting in foreign currency, tools for streamlining the payment process, and considerations for fostering enduring relationships with international suppliers.

Addressing the challenges of paying overseas bills

Lack of understanding of the foreign exchange market

One of the main reasons why Canadian businesses hesitate to pay for imports using foreign currencies is their lack of understanding of the foreign exchange market. Managing fluctuations in exchange rates and hedging against currency risks can seem daunting. However, the potential benefits of paying in foreign currency make it worth exploring.

Payment standard differences and unexpected costs

Another challenge faced by businesses when paying overseas bills is the differences in payment standards and methods from one country to another. These differences can result in unexpected costs, such as higher processing fees in areas where correspondent networks are not established. Likewise, if a business is partnered with a financial institution lacking SWIFT capabilities, conducting payments via a non-SWIFT bank can incur higher costs and vulnerability to fraud.

Benefits of paying in foreign currency

Advantages of favorable exchange rates

One of the key benefits of paying in foreign currency is the potential to take advantage of favorable exchange rates. When the U.S. dollar is worth more than the foreign currency, businesses can save on the cost of importing goods by making payments in foreign funds. This can lead to significant savings and improved profitability.

Avoiding costs associated with currency conversion

Paying in U.S. dollars often incurs additional costs for businesses. Suppliers from other countries might incorporate an extra cost when quoting prices in U.S. dollars, aiming to counterbalance the fees linked to currency conversion and added processing costs essential for payment acceptance. By paying in the exporter's local currency, businesses can avoid these additional charges and potentially negotiate better prices with suppliers.

Transparency and reduced risk of unexpected costs

Paying in foreign currency provides greater transparency in transactions and reduces the risk of unexpected costs. Businesses can have a clearer picture of the cost of goods by using dual-currency invoices, which provide the export price in both U.S. dollars and the local currency. This helps businesses better manage their cash flow and plan for potential fluctuations in exchange rates.

Tools to simplify importing goods using foreign currencies

Dual-currency invoice

A dual-currency invoice is a tool that helps importers gain a clearer picture of the cost of goods by providing the export price in both U.S. dollars and the local currency. This allows businesses to understand the potential impact of exchange rate fluctuations on their costs. However, it is important to note that the final pricing will be based on the exchange rate in effect when the agreement is finalized, which means the actual pricing could rise or fall depending on market conditions.

Forward contracts

To manage future cash flow payables exposure, businesses can use forward contracts. A forward contract allows the buyer to lock in an exchange rate at the time of agreement and utilize the contract as invoices come due. This reduces the risk of disadvantageous market moves and provides a more certain determination of the buying price. Importers can hedge the entire amount upfront or lock in a certain percentage of the anticipated cash flow and then layer on additional currency purchases as they become certain.

Challenges faced by vendors when payments are made in U.S. dollars

When businesses choose to pay their overseas vendors in U.S. dollars, it can create challenges for the vendors themselves. The vendor's financial institution automatically converts the payment to the currency of the receiving account, often without contacting the recipient. This can result in delays in the receipt of funds, as many banks take two business days to post cross-border payments to accounts. Additionally, the vendor's reconciliation team may struggle to match the payment credit to the invoices due to the difference in the converted local currency amount and the amount on the invoice. This can create difficulties in the accounts receivable (A/R) process for the vendor.

Considerations for long-term relationships with overseas suppliers

For businesses with long-term relationships with overseas suppliers, there are additional considerations to consider. Fixed price contracts can be negotiated to protect against future fluctuations in exchange rates. These contracts ensure a fixed price for a specified period, providing cost stability and predictability. Medium-term foreign exchange protection can also be arranged to mitigate the risk of unfavorable market moves. However, at some point, businesses may need to explore alternative suppliers to ensure competitiveness and adapt to changing market conditions.

Paying overseas suppliers in foreign currency can offer numerous benefits for Canadian businesses. By taking advantage of favorable exchange rates, avoiding costs associated with currency conversion, and improving transparency in transactions, businesses can optimize their international payments and improve their bottom line. Utilizing tools such as dual-currency invoices and forward contracts can simplify the payment process and reduce risk. However, it is important to consider the challenges faced by vendors when payments are made in U.S. dollars and to navigate the complexities of determining duties and taxes for imports into Canada. By understanding these considerations and exploring long-term strategies, businesses can effectively manage their overseas payments and strengthen their international relationships.

Save on foreign exchange conversion costs with MTFX

As businesses navigate the process of paying overseas bills, it is important to consider foreign exchange fees. Working with a trusted foreign exchange provider, such as MTFX, can help businesses save on these fees. MTFX offers competitive exchange rates and low fees, allowing businesses to optimize their international payments. By partnering with MTFX, businesses can streamline their foreign currency transactions and focus on growing their global operations.

Open an account today and enjoy competitive exchange rates, low transfer fees, and quick, easy international money transfers.