How should a small business pay an overseas supplier?

Paying a supplier abroad feels like paying one at home. You enter details, press send and the money goes. The cost is hidden in the exchange rate, which is why two owners paying the same invoice can end up with very different bills.

This page recommends no provider and quotes no current rates, because both change daily. The rates, margins and fees in the examples are assumptions chosen to show the method.

What does it cost to pay an overseas supplier?

Three things add to the cost. Not every provider charges all of them.

• The transfer fee. A fixed charge for each payment, or sometimes a monthly charge on the account.
• The exchange rate margin. A percentage added to the market rate when your pounds are converted.
• Charges on the way. Other banks in the route can deduct their own fees, so the supplier may receive less than you meant. Ask the provider whether you can cover those charges so the supplier receives the full invoice amount.

The fee is easy to see. The margin and the charges on the way are not, so ask for both before you send.

What is the exchange rate margin?

The mid-market rate is the midpoint between the buy and sell prices for a currency pair on the currency markets. It is the fairest benchmark for what a currency is worth at a given moment. A provider rarely offers you that rate. It adds a margin, which is the gap between the mid-market rate and the rate you actually get.

The margin is a percentage, so a payment ten times as large carries ten times the margin. That is why it matters more as invoices grow. To find yours, compare the rate you are offered with the mid-market rate at the same moment and work out the gap as a percentage.

What does one payment really cost?

Take a €23,000 invoice. At an assumed mid-market rate of €1.15 to the pound, that is £20,000. Two providers offer to send it.

Provider A looks normal. A fee of £25 is small, and most owners would not question it. The margin of £500 is what makes it expensive. Provider B charges a lower fee and a far lower margin, so the same invoice costs £400 less to send.

What does it cost over a year?

A supplier you pay once is a single comparison. A supplier you pay every two months is a standing cost. The same two providers over six payments a year look like this.

That is £2,400 a year on one supplier. A business with several overseas suppliers can multiply it. The comparison is worth repeating each year, because margins and fees change.

How long does an international payment take?

It depends on the route, the currencies and any checks the provider makes. Payments abroad often take longer than payments at home, and a payment can be held while a firm checks who is sending and receiving it.

Ask the provider for the expected arrival date before you send, and add a few days before the supplier's deadline. A late payment can mean a delayed shipment, and a delayed shipment can mean lost sales.

What should you ask when comparing providers?

Not every provider is a bank. If the firm is not, ask whether it is authorised by the FCA and where it holds customer money. The business savings accounts article explains the £120,000 deposit limit and which firms it applies to.

How do you avoid payment fraud?

Bank mandate fraud is the main risk. A fraudster poses as a supplier you already deal with and says their bank details have changed, so that your next payment goes to them. The National Business Crime Centre says to verify payments and supplier details directly with the company, on a phone number you already know or in person.

• Stop. Pause on any urgent request or change of bank details.
• Challenge. Call the supplier on a number you already hold, not one from the email.
• Protect. If you suspect a scam, contact your bank at once and report it to Action Fraud.

Set rules inside the business too. Only authorised staff should be able to change a supplier's details, and large payments should need a second approval. Our signatories article explains how two to sign works.

How is the payment recorded for VAT?

GOV.UK says purchases and sales in a foreign currency must be converted to sterling when you record them in your VAT accounts. There are three routes.

• The UK market selling rate at the time of supply. GOV.UK says rates published in national newspapers are acceptable.
• HMRC's published rate for the period. This is usually a calendar month.
• Another method, including commercial rates. HMRC must approve it first. Forward rates, and methods based on them, cannot be used.

Whichever you choose, keep the rate you used and the date with the invoice. Import VAT and customs duty are separate costs that this page does not cover, so check those with your accountant or freight agent.

What should an owner do this week?

1. List your overseas suppliers and what you pay each year. Use last year's statements to total the payments in pounds.
2. Ask your current provider for its margin and fee. Ask for the margin as a percentage of the mid-market rate.
3. Get a quote from one other provider for the same payment. Compare the total pounds needed to send the same amount.
4. Check every supplier's bank details by phone. Use a number you already know, and note the date you checked.
5. Set a second approval on large payments. Ask your bank how to set it up.

Overseas payments are one more cost that comes straight off profit. The business bank account fees article shows how they fit into a year of charges. You can see how similar businesses near you are doing with our free competitor report, and the Grow profit page covers how to win and keep customers. The IQ Money calculators let you put your own figures into the sums.

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