Currency converter tools can be incredibly useful for freelancers and businesses that work with international clients. These tools allow you to get an instant estimate of how much money you’re dealing with when converting between currencies. However, a lot of people—particularly freelancers who invoice clients abroad—make a critical mistake when using these tools. They rely on the mid-market exchange rate, which isn’t the rate they actually receive when the money is converted into their accounts. In addition, exchange rates fluctuate, meaning that between sending an invoice and receiving payment, the rate could change significantly, impacting your final earnings.
In this article, we’ll walk you through common mistakes freelancers make when pricing their services in a foreign currency and how to properly account for variations in exchange rates and bank fees to protect your income.
The Problem with Relying on the Mid-Market Rate
Most online currency converter tools display the mid-market rate, which is essentially the midpoint between the buy and sell rates in the global foreign exchange market. While it’s a useful reference, it’s not the rate you’ll receive when you actually exchange currency through a bank or financial institution.
For example, if you’re a freelancer in the U.S. invoicing a client in the U.K., and the mid-market rate shows 1 USD = 0.80 GBP, that’s not necessarily what you’ll get when your client pays you. Financial institutions typically offer a rate slightly worse than the mid-market rate to account for their own fees and profit margins.
If you rely solely on the mid-market rate when pricing your services, you may end up being shortchanged once the money is converted.
The Impact of Exchange Rate Fluctuations
Another factor that freelancers often overlook is exchange rate volatility. Currencies fluctuate in value frequently—sometimes by the minute. This means that between the time you send an invoice and when your client actually makes the payment, the exchange rate could shift, either in your favor or against you.
Let’s say you’re a U.S.-based freelancer and you invoice a client in the U.K. for $1,000. When you send the invoice, the exchange rate is 1 USD = 0.80 GBP, so you expect the client to pay £800. However, by the time the client pays the invoice, the exchange rate has shifted to 1 USD = 0.78 GBP. Now, instead of receiving £800, you get only £780 for the same $1,000 invoice.
To further complicate things, even if the client pays the exact amount in pounds that you expect, the funds still have to go through your bank or payment processor, which will almost certainly charge a transaction fee or offer a less favorable exchange rate.
Example: A Freelancer in the U.S. Invoicing a U.K. Client
Let’s look at an example. Suppose you’re a freelance graphic designer based in the U.S. and you’ve completed a job for a client in the U.K. You’ve agreed on a price of $1,000, but your client prefers to pay in pounds.
You open a currency converter tool, which shows you that $1,000 at the current mid-market rate (1 USD = 0.80 GBP) equals £800. So, you decide to invoice the client for £800.
This is where many freelancers make their mistake. First, your client might not pay the invoice immediately, and the exchange rate might change by the time they do. Second, when the payment finally reaches your account, your bank will likely charge a fee and give you a slightly worse exchange rate than the mid-market rate.
If the exchange rate has shifted to 1 USD = 0.78 GBP by the time the client pays, the £800 payment will convert into $975 instead of $1,000. On top of that, your bank could charge a conversion fee of, say, 2%, reducing your final payout even further. In the end, you might receive less than $950 for a job you originally priced at $1,000.
How to Protect Yourself: Practical Steps to Avoid Currency Conversion Losses
To avoid this pitfall, freelancers should follow these practical steps when dealing with international clients:
- Start with your target income: Determine how much you want to be paid in your local currency (e.g., USD). This ensures that you know the exact amount you need to cover your costs and desired profit.
- Add a buffer for exchange rate changes: Since the exchange rate may fluctuate by the time your client pays, it’s smart to add a small margin to the rate you use when quoting prices. For example, if the mid-market rate is 1 USD = 0.80 GBP, use a rate like 1 USD = 0.78 GBP to account for potential fluctuations.
- Account for bank fees: Most financial institutions and payment processors will charge a fee for converting foreign currency. This can range from 1-5%, depending on the provider. To cover these fees, you can either:
- Add a percentage markup to the price you’re quoting.
- Specify in your contract or invoice that the client is responsible for covering any bank fees or conversion charges.
- Invoice in your own currency: A more straightforward way to manage this risk is to invoice the client in your local currency (USD, in this case). This way, the client takes on the exchange rate risk instead of you. However, keep in mind that some clients may prefer paying in their local currency to avoid confusion or additional fees on their end.
- Use specialized payment platforms: Some payment platforms, like Wise (formerly TransferWise) or Rutland FX, allow you to receive payments in foreign currencies with better exchange rates and lower fees compared to traditional banks. Consider using these platforms if you’re dealing with international clients frequently.
Conclusion
Currency converter tools can be very useful, but they can lead to misunderstandings if used incorrectly. Many freelancers make the mistake of pricing their services using the mid-market rate, only to find that by the time they’re paid, exchange rate fluctuations and bank fees have eaten into their earnings.
The best approach is to understand the risks associated with currency conversion and take steps to protect yourself. Start with your target income, add a margin to account for potential rate changes and fees, and whenever possible, invoice in your own currency. By doing so, you’ll avoid unpleasant surprises and ensure that you receive the amount you deserve for your hard work.