The number of companies that have business concerns all over the world has increased exponentially in recent decades. In 1970, there were 7,000 multinational enterprises. By 2008, the number of multinational companies had jumped to around 82,000. Expanding into international markets presents considerable opportunities to a company, but it also creates complexity and challenges.
A company doesn’t have to have branches or offices in another country to encounter international accounts payable (AP) situations. Some organizations, such as universities, might regularly send employees overseas or have representatives conducting business abroad, which can lead to invoices from foreign companies or requests for payment from foreign individuals or entities.
International accounts payable is one challenging area for companies. Differing regulations, fluctuations in the currency market and different time zones can put a strain on even the most robust back-office accounts payable team. Understanding how cross-border accounting differs from domestic processes allows your company to develop global payment solutions that will streamline your process and ensure that vendors are paid on time, no matter where in the world they are located.
Understand International Accounts Payable
Accounts payable are what a company owes to suppliers or vendors for goods or services it received. In the case of international accounts payable, those suppliers and vendors are located in a country that is not the home base of the organization. For example, a U.S.-based consulting firm that decides to open an office in France is likely to receive invoices from the French companies it works with. A company that regularly sends employees abroad for business purposes is also likely to receive invoices from international companies. Companies that import products from other countries will also have to contend with international accounts payable.
Examples of International Accounts Payable
International accounts payable can often be divided into categories, based on who is being paid and the service or product being paid for. Not every company that has international connections will use each category. Some enterprises might only need to make payments in a single category, for instance. The categories include:
- Invoices: A company that purchases supplies or equipment from an international vendor or that has an agreement with an international service provider will most likely receive a regular invoice from that vendor for the cost of goods or services.
- Expense reimbursements: A company that has employees working overseas or traveling abroad for business purposes can receive expense reimbursement requests from a foreign entity.
- Rent: If a company has an office space, headquarters or housing abroad, it will likely need to pay rent on those properties.
- Utilities: Similar to rent, a company with property in another country likely needs to pay for utility use at the property.
- Awards, stipends and honoraria: Some organizations, such as universities, regularly invite people from other countries to speak or give presentations in the U.S. Alternatively, an organization with a branch in another country might issue a stipend or honorarium to an individual from that country.
In addition to different payment categories, international accounts payable also has different payee categories, based on their tax withholding requirements. Payee categories include:
- Foreign person: A foreign person is an individual, business, trust or estate that cannot be classified as a U.S. person. Payments made to foreign persons are subject to withholding by the Internal Revenue Service (IRS).
- Non-resident alien: A non-resident alien is an individual who’s not a U.S. citizen or a resident alien of the U.S.
- Resident alien: A resident alien is an individual who’s not a U.S. citizen or national, but who does have a green card and a social security number. While non-resident aliens and foreign persons are subject to withholding, resident aliens are not.
When a U.S.-based company is dealing with international accounts payable, the companies or individuals it works with need to complete the appropriate tax forms. Resident aliens may be paid on a 1099 basis and may complete Form W-9. Foreign persons and non-resident aliens should complete the appropriate Form W-8. Companies that pay foreign persons or non-resident aliens are responsible for withholding tax from their payments if the income is sourced from the U.S.
Combat Accounts Payable Challenges Experienced by Global Businesses
Beyond the challenges accounts payable departments face when handling domestic AP, international AP comes with its own set of issues and concerns. Carefully analyzing each potential challenge can help your team choose the most appropriate solution.
1. Choosing a Currency
Is it better for a U.S.-based company that is working with international vendors or that has branches overseas to pay in U.S. dollars or in the vendor’s currency? Many U.S. companies prefer to pay in U.S. dollars, thinking that keeping the transactions in their own currency will streamline the process and help them avoid the complexity of the foreign currency exchange.
In reality, there are times when paying in the currency of the vendor makes more sense. If cash flow is a concern for your business, electing to pay in the currency of the vendor can help. When you issue payment in U.S. dollars, the money leaves your account immediately, which can limit the amount of cash on hand. If you decide to pay in a foreign currency, your bank or other financial institution will not withdraw the funds from the account until the currency conversion is complete. Depending on your bank and payment method, the conversion can take a couple of days, providing you with a financial cushion.
Deciding to pay in the currency of your vendor can also improve your company’s relationship with them and could potentially reduce the price you pay for your goods or services. If you want to pay in U.S. dollars, someone needs to figure out how much to charge your company for the product sold or service received in dollars rather than in their own country’s currency. Since the currency market is always in flux, a vendor might tack on a bit of cushioning when giving you a price in U.S. dollars, to hedge against the risk of their currency suddenly losing value before you pay.
If a vendor doesn’t quote you a price in U.S. dollars, it is up to you to guess the appropriate amount to pay, which can change suddenly as the currency exchange rate changes.
Additionally, paying in the vendor’s currency can help to increase their cash flow, making them more likely to want to continue to work with your business. There can be a delay on the vendor’s end when you pay in U.S. dollars, as they need to wait for the currency conversion. Using their own currency eliminates the need for conversion and allows the money to be immediately available to your vendors.
2. Choosing a Payment Method
Choosing the most efficient and cost-effective way to pay international vendors is another ongoing concern for businesses that either work with global companies or have a global presence. Wire transfers are a popular global payment solution. Wired money arrives in real-time, meaning a vendor gets paid instantly. Other payment options are global automated clearing house (ACH) transfers or services such as PayPal.
There are advantages and disadvantages to each payment method. Wire transfers are fast, but they also tend to have the highest fees. Any payment method can be subject to fraud or to people posing as vendors and collecting money that isn’t owed to them.
If a vendor has a preferred payment method, the accounts payable team must understand what it is and how to use it. In some cases, if a vendor’s preferred method of being paid isn’t one a company uses or is willing to use, issues can arise in making sure that the vendor receives the amount owed to them. Offering multiple payment methods to vendors can also increase the workload on a global accounts payable team. For that reason, some departments choose to offer only one or two methods.
3. Managing and Adjusting to Regulations
Remittance rules govern how you send money internationally. There are thousands of different rules, and keeping them all straight and making sure a company is following the appropriate ones for the country it is sending money to can be difficult. One regulation to be aware of is knowing the maximum you can send from the U.S. to another country over a single day. Different countries have different daily limits.
4. Avoiding Fraud
Paying vendors who are based internationally can increase your company’s risk of exposure to fraud. It can be difficult to verify the source of an invoice when it comes from abroad. Additionally, it is easy for scam artists to impersonate foreign entities or businesses. Even companies that are household names have been fooled by scammers and have lost over $100 million. When paying global vendors, it’s important you confirm who you are paying before you send money.
One way to minimize the risk of fraud is to only issue payments to an account in the name of the vendor. If an invoice asks you to pay an individual or a company name you don’t recognize, check in with your point of contact to make sure that the invoice is legitimate. It can also be worthwhile to explain your payment policies and procedures to vendors and other payees when you enter into a contract with them.
5. Reporting and Withholding Taxes
Taxes can be complicated enough when you work with U.S-based companies or employees who are U.S. citizens. The process becomes even more complex when you work with international businesses or individuals. Failing to withhold or report the appropriate amount of taxes can lead to an audit. If the IRS finds that your company didn’t withhold or report enough tax from international vendors or persons, it can charge you penalties and interest.
Implement AP Automation
When working with international vendors or handling accounts payable abroad, there are a lot of things to keep in mind. Implementing AP automation can streamline the process of collecting invoices, getting approvals and issuing payments. Some of the ways that AP automation can provide global accounting solutions include:
- Streamline invoice collection: Using AP automation software improves the process of collecting invoices from vendors, as well as the process of collecting expense reimbursement requests and other requests for payment. Vendors and payees are instructed to email their invoices to a designated address. Data from the invoices is then extracted using optical character recognition (OCR). Relevant information, such as amount due, order number, vendor number and due date, are all compiled into your company’s accounting software.
- Automating workflow: Automation software eliminates the need to have an employee or group of employees sift through each invoice and sort each one. The automated workflow process will also note any discrepancies or errors on an invoice and flag those. For example, if an invoice suddenly has a different vendor name, address or payment instructions, the system will flag it, and someone from your team can manually review it.
- Immediately apply business rules: Once the invoices are sorted, the software can apply the appropriate rules to them. Purchase order (PO) invoices can be compared to the PO to confirm that the amount charged is the amount agreed to and the items or services received are correct. Expense requests are automatically sent to the person responsible for approving them. Once approved, the reimbursements can be made to the entities making the requests.
- Streamlines payment processes: Using manual AP processes, issuing payments to entities and individuals can be complex and time-consuming. Your business might have paid via check, which would require a signature and confirmation before being sent. Or, it might have used wire transfers to send money to international vendors. With automated software, paying vendors and other payees is much simpler. Payments via ACH can be sent automatically once the invoices are approved.
See How Vanguard Systems Can Solve Your Global Accounts Payable Challenges
Making sure that vendors and payees are paid on-time and in-full is necessary for maintaining your company’s stellar reputation. In an ever more global world, it’s essential to have processes in place that ensure that cross-border and international payments are made as quickly and efficiently as domestic ones. Whether your company is based in the U.S. and working with vendors and payees abroad or has international offices and needs to make payments to companies in other countries, using global accounting software that automates the invoice collection and payment process is a must.
Vanguard Systems’ automated accounts payable software can help your company save time and money and can minimize the risk of errors or the chance of fraud. To see how our software can improve your international accounts payable situation, contact us today to schedule a demo.