Benefits of Billing in a Foreign Currency
Thanks to modern technology, SMEs and freelancers can acquire customers all over the world more cheaply and easily than ever. Many of them expect that billing in their home currency, especially if it’s the US dollar, makes the most financial sense. However, there are several benefits to billing in a foreign currency, including the following:
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Broader Base of Potential Customers
Some companies prefer to pay for goods and services in their local currency. Others demand it. They don’t want to deal with currency conversions and exchange rate fluctuations. By giving them this option, you’re appealing to more potential customers.
The exceptions are countries with heavily regulated local currencies, such as China and Malaysia, where clients often prefer to be invoiced in US dollars. It gives them greater flexibility when transferring money. They may even offer you financial incentives for such an arrangement.
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Lower Costs
If your customers are doing the conversion, they may shift the associated costs—and then some—onto you. They could charge you a flat conversion fee, or deduct it from the invoice’s total amount due. On top of that, they might choose an exchange rate with a generous margin that works in their favor.
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Greater Control
By keeping the currency conversion process in your own hands, you’ll maintain control over the associated costs. You can take advantage of currency risk tools offered by many international money transfer providers, such as forward contracts and limit orders, to protect yourself from unfavorable exchange rates and exchange rate volatility. Read our guide on How to Manage Currency Risk.
How to Bill in a Foreign Currency
Clearly specify the payment terms in your initial contract.
To reduce the chances of disagreements down the line and protect your cashflow, establish the currency in which you’ll be paid and the payment schedule. Note that the less time there is between delivery of a product/service and receipt of payment, the less exposed you’ll be to currency risk. In addition to requesting immediate or short payment terms, you might even consider adding a clause to the contract that requires a price renegotiation in the event of a dramatic exchange rate fluctuation.
Bill big, if possible.
Typically, the larger the amount of an individual bill, the less you’ll be charged—proportionally speaking—for a currency conversion. So you may wish to decrease the frequency of invoicing (e.g., from bi-weekly to monthly) to realize this savings. If you’re performing only small and infrequent jobs for a particular client, consider building the extra conversion costs into your total amount due.
Create an Account with an International Money Transfer Provider
Susan Connolly, a freelance writer in Ireland, learned the hard way that it’s important to research money transfer methods prior to invoicing customers. She has a lot of clients in the UK who prefer to be billed in pounds. When Susan first determined how much to bill, she mistakenly relied on a web site that gave her the “mid-market” exchange rate.
As Susan eventually learned, this is the rate that banks charge each other and not even close to what they offer consumers. Banks tend to build big profit margins into their consumer exchange rates. “Freelancing can be an awesome way to work,” says Susan. “But you can get in trouble quickly if you don’t pay attention to your bottom line. Don’t make the same mistakes I did--weigh your money transfer options carefully.”
In contrast to traditional financial institutions, modern money transfer providers generally offer exchange rates that are closer to the mid-market rate. Susan ended up creating an account with Transferwise (read our review), but there are plenty of other options that suit different needs. Use our comparison tool to quickly determine which provider is right for you. It will eliminate any guesswork involved with billing in a foreign currency, because you’ll see exactly how much money ends up in your bottom line.
