Most U.S. exporters invoice only in U.S. dollars, even though many of their foreign competitors invoice in multiple currencies. Maybe they’re wary of having to open bank accounts abroad.
More often, an exporting business is worried that invoicing in both dollars and a foreign currency can introduce risks related to currency volatility. And it’s true: moving to dual-currency invoices so that overseas customers can buy a product in local currency does add risk around exchange rate fluctuations that could theoretically eat into profits.
But that risk can be managed via hedging—basically insurance to protect your profits. Any risks of dual-currency invoicing are outweighed by the benefits of making it easier for customers overseas to do business with you: increased sales and revenues.
How Dual-Currency Invoicing Works
Invoicing in foreign currencies is simple. You provide customers with quotes and invoices in two currencies, U.S. dollars and the buyer’s local currency. This practice is common for exporters around the globe, especially in Europe where multiple currencies are used frequently.
Here’s an example of how a U.S. exporter could invoice in two currencies. Imagine you want to sell a $10,000 product to a European buyer. You’d create an indicative Euro price quote based on the current U.S. dollar-euro FX rate. Your salesperson could log into a third-party system provided by a financial services company (such as MONEX) and get an up-to-the-minute quote based on the current rate.
Then you issue an invoice featuring two prices—$10,000 and, say, €9,001. The invoice should stipulate that if the buyer wants to pay in foreign currency, you will finalize that price at the time they’re ready to commit to the order. Because the exchange rate could change.
Now imagine the buyer is ready to buy two weeks later. The euro has weakened slightly, so it’s going to cost €9,006 to complete the order. This is the final, firm price at which you’ll sell your product. If the buyer agrees, then the final invoice issued would list a price of €9006.
The Risk—and the Solution
Now imagine that payment is due in 30 days. The obvious risk is that the USD-EUR rate could shift adversely before the money arrives, putting the exporter at a loss.
Not to worry: you can manage the risk of this potential volatility through forward contracts. These allow you to lock in buying a certain amount of currency at a certain rate. So in the above scenario, you could purchase a forward contract allowing you to sell €9,006 for $10,000 on a 30-day term. If the buyer agrees to the final price on December 1st, for example, the forward contract could lock the price through January 1st. (Forward contracts are available for up to two years and can involve any two currencies.)
The important thing is to lock in the rate that you’ve guaranteed to your buyer, using a forward contract purchased through your financial provider.
Important side note: You don’t need foreign bank accounts if you’re invoicing in foreign currencies. These transactions can be processed wholly within the U.S.—companies that specialize in them, such as Monex, can handle them using what are called holding balances.
Basically, this means foreign currencies your business deals with will be received on your behalf.
If you’re an exporter only invoicing in dollars, you’re putting yourself at a disadvantage. Put yourself in the customer’s shoes: If given the option of two similarly priced products, one offered only in dollars and the other in your local currency, which would you choose? Don’t let overseas competitors snag your customers by offering them the chance to pay in the currency they have on hand.
