Businesses are going global. No matter the size of your company, an international invoice is likely to land on your desk at some point.
You don’t expect excessive charges and complicated processes for regular invoices - so you shouldn’t tolerate it for international invoices either.
We’ve put together this guide to show you the best way for your company to send money abroad.
- Why trade internationally?
- Don’t get ripped off when sending money abroad
- The best way to pay an international invoice
- Understanding your international invoices
- Should VAT be added to an international invoice?
###Why trade internationally?
From small boutiques and e-commerce stores to startups and agencies - there are few companies that don’t benefit from trading internationally.
Paying for talent, products and services abroad can open up new opportunities and enable companies to be more competitive.
It’s not just big businesses leaving international footprints either. Our YouGov study in the UK revealed that greater use of international resources has a very positive impact on small and medium size businesses (SMEs).
Three quarters of those doing some form of business beyond the UK said expanding internationally has increased their profitability.
###Don’t get ripped off
If you are unsure which is the easiest and cheapest way to pay an international invoice then you’re not alone.
Currently, the most common way for SMEs to send money abroad is through a business bank account. That can come at a staggeringly high cost.
These are the charges for a UK business paying a €2,000 EUR invoice:
Unfortunately, most SMEs are unaware that this is happening because the charges are hidden from them when the transaction takes place.
The same YouGov study revealed that more than a quarter (28%) of UK SMEs believed they were getting a good deal from their banks - either making the transfer for free or being charged a flat rate. Neither were true.
One in five (19%) even admitted they had no idea how they were being charged.
###The best way to pay an international invoice
Your company will be used to paying domestic invoices through your business bank account so you might assume it’s easier to pay your international invoices in the same way.
More than half of SMEs in the UK that make international payments do this. However, banks use that status quo to charge excessive fees and provide you with outdated international payment technology.
The good news is that there are a variety of options to send money abroad and switching could save your company a lot of money and make the process easier.
####Your business bank account
Banks can charge excessive fees on international payments then add secret markups when they change your currency by presenting a misleading exchange rate - see the table above for more.
Instead of the real exchange rate - the one that gets printed in the media and can be quickly Googled - the banks show a less favourable rate to people trying to exchange money on both sides.
Last year in the UK alone, a study showed that SMEs were overcharged £4,078,000,000 while paying for products, services and talent abroad. That’s ten times more than big business lost in bank fees on international payments in the same year.
That equates to a loss of £755 for every business - and if you start paying a lot of international invoices then the cost to yours could be much higher.
PayPal is another popular way for SMEs to make international payments.
Like the banks, Paypal also charges a markup when they convert your currency. Unlike the banks however, they deserve some credit for honesty.
They explain that transferring money from one currency to another is charged at the retail exchange rate, as well as an additional currency conversion fee on top of that. In fact, their currency conversion fees (2.5% above the wholesale exchange rate on top of transactional fees) can be as high as 4.5%.
With their fee added, PayPay then shows you their currency conversion rate. Just remember that’s not the actual exchange rate though.
Even if you did pay attention during maths back in school, figuring out the fee that PayPal deducts in this process is pretty difficult.
More than £500 million is now moved across borders every month using the Wise platform and it’s increasingly being used by SMEs to pay international invoices.
As a result, Wise has now launched its dedicated product, Wise Business, which makes sending money abroad up to seven times cheaper compared to using a business bank account.
The process is simple and you pay a single low fee that is always clear before the payment is made. Your money is then sent abroad to the supplier at the real mid-market exchange rate.
Like the large banks and financial institutions, Wise is fully regulated by the Financial Conduct Authority and verifies its users to protect against fraud and money laundering.
But Wise uses smarter international payment technology so that you pay less. You can find out how Wise works here.
There are no hidden fees and no secret markups. You can visit wise.com right now to see how much an international payment would cost you and then compare that to the higher fees provided by your bank or PayPal.
###Understanding your international invoice
An invoice is a bill sent by the provider of a product or service. It contains the terms of payment, as well as all the details you’ll need to get it paid. From your perspective, it’s also called a purchase invoice. However, the seller might call it a sales invoice.
In the UK anyone providing a product or service to your business has to issue an invoice if you are both VAT registered.
Your international invoices may have a different currency and separate rules for VAT, but they will still need to comply with the same format expected for suppliers in your country.
Here are some things that should be on every international invoice you receive:
The word ‘invoice’
This avoids confusion and is a legal requirement in the UK. It sounds obvious, but you don’t want your invoices mixed up with receipts so don’t let your suppliers forget this or name it differently.
This is usually the date the supplier sent you (or ‘raised’) the invoice.
Their name and address as the supplier
They need to write their legal name and address, whether a company or an individual.
Your name and address as the purchaser
You need to make sure they use your correct legal name and address too.
Every supplier will have their own system, but they should provide a unique number for the invoice. It is often the year followed by the number issued by the supplier that year.
This is the most important bit if they want to get paid. An international invoice only needs to include the IBAN number. This is the unique international code that identifies their bank account. International invoices are also likely to include a SWIFT / BIC code to identify their bank, but it’s not essential as the IBAN number already tells you this.
Overview of items purchased
This usually includes a description of the items delivered, along with quantities and prices. This is standard for both services and products, although freelancers will usually provide the hours they worked or tasks completed.
The currency used on an international invoice is up to you and your supplier.
And here are some other things that will be on some invoices you receive:
Company registration number
You may increasingly find yourself working with individuals, but if your supplier is a company then they may add this.
Terms of payment
Your supplier will usually add conditions about how and when you should pay, such as the deadline by which they expect payment and a reminder to add the reference number. They might even tell you how the charge will rise if you don’t pay on time.
This bit gets tricky so let’s look at that in more detail next.
###Should VAT be added to an international invoice?
VAT stands for value added tax and is charged on goods and services inside the European Union.
If you are paying an invoice from another EU country - and both you and your supplier are VAT-registered - then your supplier needs to include both VAT numbers. That way, no VAT gets added to the invoice, although you’ll need to raise a reversed VAT invoice afterwards.
If you are not VAT-registered then the supplier needs to provide their VAT number and add the VAT charge applicable in their country to the invoice.
If the supplier is not VAT-registered or if either of you are outside the EU then no VAT applies and there will be no VAT number on the invoice.
This is already pretty complicated. However, there are also technical reasons VAT may be charged differently on goods being moved around so always check local regulations if you are unsure.
By the way, this advice applies even if your country is planning to leave the European Union. After Article 50 is triggered, it could still takes years to complete the process and change these rules.
This article will provide you with an overview of what a market entry strategy is and how to choose and develop an international market entry strategy.
This guide will help you understand what foreign exchange risk is, and how to protect your business if you perform international financial transactions.
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