ASGA

Foreign exchange is a challenge faced by importers when trading with countries such as China, but there are ways to mitigate the risks involved.

Market fluctuations, bank restrictions and payment processing speed are just some of the factors that affect Australian companies importing from places like China. With more than $27 billion of trade in 2006-07 alone, there are important reasons for getting it right.

Foreign exchange is one area where companies can address the challenges they face. By understanding the key processes behind international transactions, businesses can plan and manage the associated risks to protect their bottom line.

One option for mitigating currency exposure is to pay suppliers in local currencies. This eases the fees that local banks charge suppliers who receive international payments, and leads to better price offers on products. You could expect a discount of two to ten percent.

What costs might a foreign supplier face when receiving a US dollar payment? Foreign banks are likely to leverage the fact that the beneficiary has no opportunity to negotiate the exchange rate. Premiums up to ten percent over interbank spot rates are not uncommon in some parts of the world, not to mention transaction fees. The costs and delays to a foreign recipient of US dollars can be substantial, which presents an opportunity for the importer to negotiate a better price by reducing the costs faced by the supplier. Less money in the hands of the foreign bank means more money shared between supplier and importer

But isn’t the importer now stuck with managing the foreign exchange costs and risks? It is important to realise that the payor has a lot more flexibility around associated risks. For one, the payor can review the offerings of different foreign payments providers, and negotiate competitive rates and fees.

Paying international suppliers in their local currency does not have to be an onerous undertaking, and doing so puts the importer in a strong position for price negotiation. At the very least, have your invoice quoted in both US dollars and the local currency, and check which is more cost effective. As the saying goes, it doesn’t hurt to ask.