A question that comes up from time to time is how to bill a client for a piece of foreign associate work? The situation of course is that the foreign associate’s invoice is denominated in € or ¥ or some other currency that is not US dollars. Of course you need to bill your client right away, as soon as the invoice arrives from foreign counsel. Then it might take your client a month or more to pay you. Then you will pay foreign counsel.
And here is the first problem. Foreign currency exchange rates are not static. They change from time to time. You are holding in your hand an invoice from foreign counsel for €1000. You could look it up on xe.com to find that as of today, this is the same as $1138.41. You could bill your client for $1138.41. A month from now the client pays you $1138.41. Which is fine except that almost certainly the exchange rate has changed. If it went up, then the $1138.41 does not actually get you €1000. You might have to spend money out of your firm’s pocket to make up the difference. If it went down, then you get more than €1000 and if you only send €1000 to foreign counsel, you have enriched yourself at the client’s expense.
Yes you could always imagine doing a “true-up” later with your client. Maybe two months from now you find it necessary to refund $3.51 to your client because the exchange rate shifted in the client’s favor. So you would then have to spend maybe $50 of internal firm resources posting this refund into your billing system, and cutting a check for $3.51, and mailing it to your client. Or maybe two months from now you find it necessary to bill the client $3.51 because the exchange rate shifted the other way. So you can spend maybe $50 of internal firm resources billing the client for $3.51, and the client gets to cut a check for $3.51.
Wouldn’t it be nice to keep this from happening?
There is also a second problem. If you simply look it up on xe.com, you don’t really know what your actual exchange rate will be for the payment method that you choose for paying the foreign associate. xe.com gives you the “mid-market exchange rate” which is a mid-point between (for example) the price that people have to pay who are selling dollars and buying euros, and the price that people have to pay who are selling euros and buying dollars. You personally will never in your life pay the actual mid-market rate. You will pay a rate that is slightly different from the mid-market rate, because your service provider will charge something (instead of nothing) for the service of exchanging the currency. (Or you may pay a rate that is 7% different from the mid-market rate, which is what would have happened the last time we almost used Western Union Globalpay to send a bunch of money to WIPO on behalf of a Madrid Protocol trademark filing of one of our clients.
It gets worse when you realize that when your client’s money might be going into or out of your firm trust account and you need to account for every penny that goes into or out of that trust account. It’s not acceptable to say “oh we got it approximately right” when balancing the trust account transactions with the transactions for things like paying foreign associates. Close is not good enough.
So what can you do? You would like to lock it in that the foreign currency exchange for your invoice payment will cost some number of dollars, and then you can bill the client for that number of dollars, and the client can pay you that number of dollars, but it could be tomorrow or next month that the client pays you those dollars. And then you would like to be able to pay the foreign associate the exact amount of their invoice. And you would like this to work regardless of whether the exchange rate fluctuates (maybe a lot) during the time periods involved. You would like to avoid being a risk-taker that the exchange rate might go up or down, leaving your firm holding the bag for a shortage, or putting your firm in the position of having been enriched at the client’s expense.
In this blog article I explain how you can accomplish all of these goals, pretty much effortlessly, using any of the modern-day foreign payment systems including for example TransferWise and Afex.
So here is an example using some typical numbers.
The invoice arrives from European counsel. It is for €10000. So here is what you do next. You go to your provider and you buy €10000. With Transferwise this costs US$11,446.77, or with Afex this costs $11,466. In other words you spend $11,446.77 or $ 11,466 of your firm’s money to buy the €10000.
Then you take a peek at xe.com to see what they think €10000 is worth in dollars. The answer from xe.com is US$11,384.54.
This means that to obtain the euros from TransferWise you paid a fee of $62.23 (about half a percent of the total). Or to obtain the euros from Afex you paid a fee of $81.46 (about seven-tenths of a percent of the total).
Or if you used Western Union Globalpay as I almost did last month, you would have paid a fee of $700 (about seven percent of the total).
Anyway so now you have the €10000 in your vostro account with TransferWise or Afex or whoever you use for your foreign payments. You could wire that money to foreign counsel today or tomorrow or in a month or in two months. No matter when exactly you wire the money, foreign counsel will be satisfied that their €10000 invoice has been paid in full. Exchange rates could go up or down between now and when you wire the money and this will not change the fact that the foreign associate invoice will be paid in full, not too much and not too little.
Meanwhile you know already exactly how many US dollars you needed to buy those Euros. You can bill your US client. They could pay you today or tomorrow or next month, and if they pay that number of US dollars, then your bill to your client has been paid in full. Not too much money, not too little. You can transfer money into or out of your trust account for your client, and it is accurate down to the penny.
Now what is in the back of our minds of course is, what if your client stiffs you?
For example maybe the purpose of this €10000 expenditure was to pay some annuity in the EPO. Foreign counsel had sent you a pro forma invoice for €10000 so that you would know how much money would be needed to pay the annuity (and to pay the professional fee of EP counsel). You purchased the €10000 as described above, you billed your client, and then what if your client stiffs you? Now you are stuck holding €10000 that you don’t need. What can you do?
And the answer is, you can do any of several things.
First of course you will need to deliver the sad news to foreign counsel that the client has failed to pay for the annuity. Foreign counsel will need to close their file and cancel the pro forma invoice.
Then what do you do with the €10000 that you don’t need?
One thing is, maybe some other invoice will arrive in the future from some firm in Europe. You could use your €10000 to pay that other invoice. It might be a year from now. Who cares, with interest rates these days being so close to zero.
Or if there’s no other choice, and you need the €10000 to pay your rent or something (which is of course in US dollars), then you could convert the money back to US dollars. With TransferWise this would cost you another maybe $60. With Afex this would cost you maybe another $80. So yes you would have incurred a one-time cost of $120 or $160 if your client stiffs you and you feel the need to change the €10000 back into US dollars.
But anyway this is the way to lock in exchange rates when paying foreign associate invoices.
How do you handle locking in of foreign currency exchange rates? Please post a comment below.