It has long been commonplace to deal with suppliers that are based overseas. It is clear to see that the effects of Covid have seen this trend increase even more. The pandemic has seen the world become more digitised and it is more and more common to be dealing with people and companies that we have never met
Using providers that are based abroad is a great way to expand your business. You will often find that there are deals to be made that will boost your profit margins. However, confusion can often arise when it comes to the best way to pay these providers. You can compare the different money transfer providers to find the one that best suits your needs when looking for the cheapest way to send money, but how does this work in practice and what are the other options. Let’s take a look
Regardless of the payment method that you choose, you may find that some providers will require advanced payment. This means that you pay, in full, before you receive any goods. This is especially common when the order value is low, or when you don’t have any history with who you’re ordering from.
This upfront payment protects the providers: they know that they have the funds before any goods are shipped. However, when dealing with a company for the first time, you need to ensure that you are protected too. You can add some levels of protection by:
- Checking reviews
- Asking for a UK reference
- Placing small orders to start with
- Look into the credit history of the supplier if possible
If you aren’t keen on the risks involved with advanced payments, documentary collection may be worth exploring. This is a common alternative and it certainly has greater protections in place for your side. It works with contracts being in place between your bank and that of your provider.
The contract makes a guarantee that your bank will release funds when your provider shows export documentation. This means that no money leaves your side until you have confirmation that your goods have been shipped.
One of the most preferable ways of paying providers overseas is by using a trade account. This is great for your cash flow and it does away with the fear of paying for any goods that you won’t receive. You will find that there are providers that will allow you to receive the goods and then make payment 30 days later.
For a trade account, you will need to demonstrate your creditworthiness and show that you can be trusted. This may mean that, initially, you’ll need to use advanced payments or at least pay a percentage of the total invoice upfront.
How to move your money
Whether you agree to pay upfront or have a trade account, the time will come when you’ll need to send funds to your provider. There are numerous ways of doing this and when looking for the best option you will need to consider factors such as:
- The speed of the transfer
- The cost of associated fees
- The security of the transfer
Ideally, your chosen method will address all of these points. Bearing in mind that you will be dealing in a different currency, you will soon discover that fees are involved. These need to be minimised otherwise you soon erode the benefits of using overseas providers in the first place. Some of the available options include:
International wire transfer
This is one of the simplest ways of sending funds to providers that are based abroad. You will also find that almost all providers will be familiar with, and accept, this as a way of getting paid. Before you commit to this, it is worth carrying out some research to ensure that you are protecting yourself from excessive fees.
It is common for people to turn to a high street bank for this service. These are organisations that they are familiar with and trust. However, the truth is that these banks will often charge much higher fees than you could find elsewhere. You can often save on fees by using a money transfer company instead.
Set up an overseas bank account
If you are making plenty of payments to overseas providers, then it may be worth exploring this as an option. A foreign bank account would only bring any benefits if you are primarily dealing in one area where you are always paying with the same currency.
You are likely to find that your providers will be a fan of this method as it allows them to deal with a local bank. You should be aware though, that opening an overseas account isn’t always easy. It can often be a drain on time and money during the set-up phase.
UK account with foreign currency
Rather than opening an account in the country where you are trading, it is possible to set up an account in the UK that holds foreign currency. It is usual that a bank will expect you to already hold another account with them before they offer you this service.
One of the downsides to this option is that you cannot always access your money when you need it. If you are experiencing cash flow issues, you can’t dip into this foreign currency to ease them. You will also find that the associated fees are often less than attractive.
This option is best described as a form of hedging. It sees you insuring against the cost of currency moving in the direction that could lead to costs for you down the line. When you agree to buy currency, you agree that it will be at a set rate. This means that should the exchange rate fluctuate, you won’t be affected.
Forward contracts are a popular choice for those who are making regular transactions. Once agreed, they must be acted upon even if circumstances change.