The Western Union Business Solutions Learning Center is a blog provided for general informational purposes only and should not be construed as legal, financial, tax or accounting advice. Consult your own independent advisors regarding your particular needs and circumstances.
Many business owners assume their local currency, especially if it's the U.S. dollar (USD), is always the best or easiest way to receive or send payments for a foreign invoice.
But before deciding which currency to pay a foreign invoice in, business owners should always ask, "How much will this cost me to buy in my home currency versus another currency?" says Victor Hinojosa, director of North American partnerships with Western Union Business Solutions.
Many times the USD quote is higher than the foreign currency quote. Individuals are charged a markup fee for converting currencies regardless, so it makes sense for business owners to pay invoices in the local currency, Hinojosa says.
Learn More About Using Online FX
One simple solution is to request an invoice in the domestic and foreign currencies and compare the total costs associated with each invoice. Total costs for an international payment should factor in exchange rates, which can be calculated using an online foreign exchange currency calculator.
By using the tools from an online foreign exchange provider, such as a free currency converter, a U.S. importer could look up the exchange rate for a domestic currency invoice of 350,000 Philippine pesos (PHP). For example, if the current exchange rate was at $1 USD = 40.855 PHP, a currency converter would show that paying about $8,567 USD would equate to a payment of about 350,000 PHP.
Some business owners create tables to record and compare the current conversion-to-dollars percentages to foreign currencies.
A business owner could keep track of a transaction in USD, the sales price in USD, the current exchange rate and the calculation. "I would store that conversion rate data with the invoice so you can go back if the customer comes back and says, 'This wasn't calculated correctly,'" says Lynn Allen, president of Allen & Allen Semiotics Inc., a consulting company for the desktop database software FileMaker, in Long Beach, Calif. "You want to capture all the information correctly from that time period just in case."
Regardless of what currency is invoiced, keep in mind specific tax regulations that might impact the type of currency used. For example, in the U.K. if any value added tax (VAT) - a tax paid on most goods and services - is due on the transaction, a business owner must show the following in sterling:
· The total net value of goods and services at each VAT rate
· The amount of VAT, if any, at each rate
Keep in mind, business owners do not need to show sterling figures for each line of the invoice.
By taking a strategic approach to invoicing, businesses can potentially reduce their costs and remove barriers to attaining healthy cash flow.
 "Foreign currency transactions and VAT," HM Revenue & Customs
Example: 1USD = xx INR
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