Perhaps you've been paying your overseas vendors in U.S. dollars for decades and they've never complained. Your company may even require that international payments be denominated in U.S. dollars, a common treasury policy among American businesses buying from abroad. However, paying invoices in foreign currency could save you money and effort. The potential embedded costs of dealing in U.S. dollars are often overlooked and misconceptions abound over the risks of foreign currencies.

Of course, there are some instances when paying in U.S. dollars is efficient. Certain industries have dollar-functional supply chains where currency conversion shouldn’t occur. Multinational vendors may want U.S. dollars for their own operations, or they may have an arrangement to convert currencies via a foreign exchange hedging program. But if these considerations don't apply to your business, there may be benefits to changing your approach.

Here’s what to think about when deciding which invoice currency to use with overseas vendors.

Paying invoices in foreign currency can help improve cash flow

When you make a payment in U.S. dollars, your bank immediately withdraws the funds from your account. This ensures the dollars are sent to the vendor’s bank right away. By contrast, when you make a cross-border payment, funds are not wired until they've been converted from dollars to the vendor’s currency. Your financial institution may be willing to delay withdrawing the dollars from your account until the conversion is complete, which could take up to two business days. Two days of funds availability can be meaningful in terms of earnings credit and working capital availability.

Paying in U.S. dollars can create challenges for vendors

Your vendor may experience faster payments and an easier account reconciliation process if you choose to pay in their local currency. When supplier payments are made in U.S. dollars, the vendor’s financial institution automatically converts the payment to the currency of the receiving account, often without contacting the recipient. This could create two challenges for your vendor’s accounts receivable (A/R) team:

• Delays in receipt of funds: Many banks take two business days to post cross-border payments to accounts, even for currencies that allow delivery on the same or next day after receipt. You may be able to deliver funds more quickly with no disadvantage to your company if you pay in the vendor’s local currency.
• Difficulty matching credits to invoices: Foreign reconciliation team may struggle to match your payment credit because the converted local currency amount won’t match the amount on the invoice. They can only hope the invoice reference details you provide in the wire transfer appear on the account statement.