What Is Foreign Currency Credit?

A foreign currency credit is a type of document that is used in determining the type of currency that will be used to honor an outstanding debt. Usually in the form of a letter of credit, the foreign currency credit will specify that payment for goods and services rendered will be remitted in a currency other than the one native to the seller’s or beneficiary’s nation. There are a number of reasons why this may occur, with the current rate of exchange between the currencies involved often playing a major role in how the choice of currency is determined.

One of the ways that buyers and sellers make use of a foreign current credit is to maximize the returns that are generated from the sale of goods or services. In order to accomplish this, it is important to determine the current rate of exchange between the currency native to the buyer as well as that of the seller, and then also compare the rate of exchange with other currencies to identify which one would be most advantageous for the transaction. For example, if the seller is based in the UK and dealing with a US client, the first step in determining how to structure the foreign currency credit is to compare the current rate of exchange of the US dollar and the English pound. After assessing that rate, the seller may also consider how the two currencies compare to the current rate of exchange involving the Euro. The seller may determine that receiving the payment in Euros would result in greater returns overall and require that currency be used to settle the debt.

At other times, the reason behind the use of the foreign currency credit is not necessarily to maximize the return on an individual order, but to accommodate international customers. In this scenario, a seller would make arrangements to accept a foreign currency credit that specifies use of the currency native to the buyer. Here, the focus is not so much on making more profit, and may in fact mean making less profit on the order. What this strategy is likely to accomplish is motivating that customer to continue placing orders in the future, since the payment process is relatively simple and seems familiar, owing to the fact the customers does not have to worry about currency conversion when arranging the payment.

The structuring of a foreign currency credit must be in accordance with the laws and regulations that are currently in force in the nation where the seller or beneficiary resides. Care should be taken to assess the relative merits of accepting certain currencies for the transaction to make sure the benefits outweigh any potential liabilities. When utilized to best effect, this courtesy to international customer can go a long way toward building a loyal client base that sustains the seller’s business for many years to come.