Let’s Count: Keeping the Money You Have Earned

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 »  Articles Overview  »  Business of Translation and Interpreting  »  Financial Issues  »  Let’s Count: Keeping the Money You Have Earned

Let’s Count: Keeping the Money You Have Earned

By EvaVer | Published  05/10/2017 | Financial Issues | Recommendation:
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Quicklink: http://www.proz.com/doc/4411
Author:
EvaVer
Czech Republic
Czech to English translator
Became a member: Oct 24, 2012.
 
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Translators and agencies will haggle over every penny – and then leave half of the money to their banks or a payment system (such as PayPal, Moneybookers…). Payment arrangements proposed (or even required) by certain agencies, often using the argument that “nobody else has ever complained”, motivated me to jot a few financial ideas on paper – or rather on screen. I am sorry if this article seems rather too focused on Europe – this is where I live and what I know. Examples are based on terms and rates practiced by specific banks in the Czech Republic – please use data applicable to you for your own calculations.

When doing business within your own country, wire transfer is generally free of charge or at least cheap, and the only question therefore concerns your choice of bank, as fees (and other terms) do vary between banks. When you work for foreign clients, however, several factors must be considered:
  • Bank and similar fees
  • Exchange rates and their changes over time
  • Export or exchange controls, if any (I won’t go into details – if this applies to you, you will know more about it than I do).
For a start: a payment made in Euros between two accounts denominated in Euros is not an international payment, but an Euro payment; it is often free of charge within the Euro zone, and cheap when at least one of the parties (or rather their banks) is located outside the Euro zone. It probably doesn’t work everywhere in the world, but it certainly does in the non-Euro European countries. I have encountered agencies from the Euro zone that insisted on paying via PayPal. When they checked, they found out that it was possible to send me a wire transfer for free. There is – or was – even an agency that made national payments via PayPal. I stopped working for them, and I am not sure they are still in business.
When the payment is a truly international one, wire transfer fees will be higher, and:
  • Will differ substantially between banks
  • There is often a minimum or a flat-rate fee, so that payments should be grouped
  • Making the payment in one currency and receiving it in another is usually the most costly scenario
  • Banks take a margin for every exchange operation, so these should be kept to a minimum.

Choosing Your Bank

First of all, if you have regular clients from whom you receive international payments, you should choose a bank where fees for international payments are as low as possible. I use a different bank for my Euro and international payments (I am in a non-Euro country) than for my national business.
In the bank I use for international business, the fee for receiving an international payment is about 4 dollars (and €0.74 for a Euro payment), for sending one about 8 dollars (at my regular bank, these fees are much higher). There is a big difference between paying four dollars for a 10-dollar transaction or four dollars for a 1000-dollar one – in the first case, you lose 40% of your payment, in the second, just 0,4%. You should therefore strive to be paid on a monthly basis or even at longer intervals– e.g., when a certain amount becomes due, provided your accounting rules and the agency’s enable this. An often discussed American agency (see example below) has this system – my limit with them is set at $2500.

Choosing the Currency

Banks often charge extra when the payment is denominated in a different currency than the account, and they will always take a commission, i.e., give you a suboptimal exchange rate. This phenomenon is much worse in PayPal (I have no experience of other similar systems, but there is no reason for there to be any substantial difference). Another thing is the time factor – in this scenario, the amount is converted at the going rate when the payment is made, over which you have no control. If you receive foreign currency and keep it in your account, you can 1) use it as such, when travelling or for online purchases, or 2) exchange it when the rate is better for you, and/or 3) exchange large amounts at once, at bulk rates. At my main bank, the bulk rate for amounts over 10,000 € is about 2% better than the standard rate.

Example: Recently, a British agency wanted to send me about £100 for work done “and the bank will convert it”. I chose to open a £ account – but the ideal scenario would have been for that agency to have an € account, to convert money at bulk rates at convenient moments, and then pay their suppliers on the continent in €. Let’s consider the yield from £100 in € (i.e., what £100 of the agency’s money will give their translators in €) in three scenarios - what the agency proposed, what was actually done, and what would have been ideal to do. I am not including the fees charged by the agency’s bank, as I don’t know the terms of British banks – but the fee for an international payment is bound to be higher than for a Euro payment, which will make the difference below bigger. In this example, I used the £/€ conversion rate on the day I am writing this, which is 1.17:

Amount £ 100 Amount £ 100 Amount £ 100
Incoming Fee £ -3.15 Incoming Fee £ -3.15 Converted at the optimal moment**, exchange rate 1.31 €131
96.85 96.85 Exchanged in bulk – commission 1% -1.31
Exchange rate 1.17 €113.31 Exchange rate 1.19 €114.24 129.69
Commission 3% -3.40 Commission 3% -3.40 Incoming Fee –Euro payment -0.74
109.91 110.84 128.95
* The best rate achieved since Brexit, which can be reasonably expected again – I haven’t actually exchanged the money yet
** The best rate in the year before Brexit

The difference between the best and the worst scenario is 17%! Of course, I assumed that the agency would have exchanged the money at the very best moment, which is not very likely, but even with a rate of 1.2, the gain is over 7%!

Cheques and Other Methods

American clients often want to pay by cheque. For a European, there are several problems with that: first of all, sending a cheque by post around the world entails certain risks. Then you give it to your bank, and cause an upheaval – at least where I live, dealing with cheques is so rare that bank employees don’t know how to handle them, have to look it up, phone the management… Moreover, not all banks propose that service. Then it takes 2 months, and the fees are quite high – in my main bank, 1% of the amount with a minimum of about $12 and a maximum of about $120.

PayPal (and similar systems) is suitable for small amounts, as the fee is proportional to the amount transferred, with no minimum (although sometimes there is also a small flat-rate fee). On the other hand, the percentage is quite high, and it is not advisable to exchange currencies via PayPal – except for very small amounts where the difference remains also small in absolute value. Let’s compare payments of different amounts between these three methods (without conversion, using the terms of my banks):

Method/Amount $10 Net % $100 Net % $1000 Net %
Wire transfer fee $4 6 60 fee $4 96 96 fee $4 996 99.6
Cheque N.A. fee $12 88 88 fee $12 988 98.8
PayPal* fee $0.39 9.61 96.1 fee $3.90 96.10 96.1 fee $39 961 96.1
* Proportional fee for business transactions.

The table clearly shows that for small amounts, PayPal is superior; when the amount is around $100, it is about the same as wire transfer, and gets absurd when it is higher. It also shows that payment by cheque is never the best option (on the terms of the bank considered), unless the agency charges extra for any other method.

Example of an Unnamed Agency

If the agency charges $10 for PayPal and $20 for wire transfer (an actual example), let’s calculate the amounts at which these methods will be equivalent:

Wire transfer fees: $20 charged by the agency + $4 by the bank = $24

Cheque fees: 1%, at least $12 charged by the bank

PayPal fees: 3.9% by PayPal + $10 by the agency

Let’s compare wire transfer and cheque first: As the minimum for a cheque is lower than the flat rate for a wire transfer, the minimum fee will play no role. The maximum amount for which a cheque is cheaper than a wire transfer will then result from the formula:

1% x = $24

x = $2,400

Between wire transfer and PayPal:

0.039x + 10 = 24

x = (24-10)/0.039 = $359

Between cheque and PayPal:

0.01x = 0.039x + 10

x =3.9 + 10 = 13.9, BUT the minimum charge for a cheque is $12, so let’s try again:

0.039x + 10 = 12

x = 2/0.039 = $51.28

As you can see, wire transfer is cheaper than cheque for amounts above $2,400; wire transfer is cheaper than PayPal above $359; and cheque is cheaper than PayPal above $51.28. It shows that, for usual amounts, payment by cheque remains the cheapest method (as a result of the fees charged by the agency, not otherwise!), unless you are prepared to wait until you accumulate at least $2,400. As $10 is charged by the agency for PayPal payments, amounts lower than that cannot be paid at all, as they are lower than the minimum charge for any method.

Amount $10-$51.28 $51.28-$2,400 above $2,400
Cheapest payment method PayPal cheque wire transfer

These calculations are of course based on specific bank and agency conditions, and do not necessarily apply to you – to calculate the best payment method in each case, you can just replace the figures here with those that apply to you.

Time Factor

The question WHEN you will be paid is more or less important depending on:
  • Your cash-flow, i.e., how soon you need the money;
  • Current inflation/interest rates, i.e., how fast money is losing its value/how much you can get from holding it;
  • The volatility of interest rates.
The first two factors also apply in national business, of course. Today, in most countries, inflation and interest rates are so close to zero that they are not worth considering – there was recently a question in the forum about an agency proposing to pay faster in exchange for lower rates: at the moment, the answer is NO! The difference it makes to you is to be calculated based on inflation (if the factor decisive to you is the decrease in value) or on the interest rate you can get from a virtually risk-free investment, such as a bank deposit. Private bonds and online C2C loans are not risk free investments! When dealing with a foreign currency that you do not intend to convert, you have to consider these factors for that currency, not your own.

As an example, let’s consider an economy with higher inflation and interest rates than today in Europe – let’s say you can get 6% on your deposits, which is 0.5% per month. Therefore, each month of credit to your client represents a 0.5% difference in amount.

When discussing international payments, it’s mainly the third point that interests us: if I earn 100 dollars today and am paid a year later, how much will that represent in my country’s currency or, more to the point, in the currency in which I intend to spend the money, which is not necessarily the same? When opting for long accumulation periods so as to save bank fees, don’t forget that the exchange rate can change quite a lot. If, on the other hand, you intend to spend the foreign currency as such, the problem is just psychological – you are then dealing with that currency as if you were in a country where it’s legal tender, unless you want to engage in currency speculation. If this article brings you any new information, however, I don’t recommend it, as you probably aren’t the right kind of person for that.

Conclusion

It is worth your while to do some sums before agreeing to your client’s payment terms. You have earned your money honestly, so don’t give too much of it to intermediaries! Using PayPal for all purposes, as many do, is not always the best choice.


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