What is cross-border financing?
Cross-border financing – also known as import and export financing – refers to any association of financing that occurs outside a country’s borders. Cross-border financing helps businesses participate in global trade by providing a source of finance that enables them to compete globally and operate across their national borders.
Cross-border financing generally requires the lender or supplier to act as an agent between the company, its suppliers and the end customers. Cross-border financing is available in many varieties and includes cross-border loans, letters of credit, repatriable income or bankers’ acceptances (BA).
Key points to remember
- Cross-border financing refers to the technique of offering financing for corporate actions that take place outside a country’s borders.
- Companies seeking cross-border financing must be globally competitive and expand their business beyond their current national borders.
- While the monetary establishments corresponding to the financing banks present the first offer of cross-border financing, the private equity firms also present a financing offer for the world trade.
- Cross-border factoring allows businesses to get quick cash flow by selling their receivables to another business.
- Two types of danger associated with cross-border financing are political danger and foreign currency danger.
Understanding cross-border financing
Cross-border financing within companies can become very advanced, mainly because almost every inter-company mortgage that crosses national borders carries tax penalties. This happens even when loans or credit are extended by a third appointment, corresponding to a financial institution. Large global corporations have entire groups of accountants, legal professionals, and tax experts who are probably considering the most tax-efficient methods of financing overseas operations.
While monetary institutions retain the lion’s share of the business for many cross-border mortgage and debt capital market financings, more and more personal debtors have supported the association and the provision of loans to the global scale. US debt and mortgage capital markets remained remarkably healthy after the currency disaster of 2008 and therefore continue to provide attractive returns to international debtors.
Advantages and disadvantages of cross-border financing
Many companies opt for cross-border finance companies once they have global subsidiaries (for example, a company based in Canada with a number of subsidiaries positioned in selected countries in Europe and Asia). Opting for cross-border financing options can allow these companies to maximize their borrowing capacity and access the sources they want for sustainable global competitors.
Cross-border factoring is a kind of cross-border financing that gives businesses quick money movements that can be used to help progress and operations. In one of these financings, companies will promote their claims to another company.
This third-party company, also known as a factoring company, collects the funds from customers and transfers the funds to the sole proprietor of the business, minus the fees charged to provide the service. The advantage for business owners is that they get their money in advance reasonably ready anywhere from 30 to 120 days for the cost of their customers.
In cross-border financing, the danger of foreign money and political danger are two potential drawbacks. Foreign money hazard refers to the risk that businesses could lose money due to foreign money fee adjustments that occur when conducting global trade. When structuring the terms of a mortgage loan across countries and currencies, companies might find it difficult to acquire a good exchange rate.
Political danger refers to the danger an organization faces when doing business in another country that is experiencing political instability. Changing political climates, as well as elections, social unrest, or coups, can make it difficult to reach a deal or turn valuable funding into unprofitable funding. For this reason, some cross-border finance providers may limit business activity in certain regions of the world.
Real world forum for cross-border financing
In September 2017, Japanese conglomerate Toshiba agreed to promote its roughly $18 billion memory chip unit to a consortium led by Bain Capital Personal Fairness. The group of buyers included US companies, Apple, Inc. and Dell, Inc., among others.
The acquisition required US-headquartered companies across the consortium to acquire Japanese yen to complete the transaction. Bain Capital also demanded more than $3 billion from Apple to close the deal. The benefit to these US companies of collaborating on a cross-border deal was that it helped them secure continued access to Toshiba’s valuable memory chips.
Lately, many companies, as well as sponsors, have chosen mortgage financing over debt financing. This has affected the construction of many cross-border mortgage finance deals, significantly as covenant-lite (cov-lite) loans offer the borrower considerably greater flexibility than some conventional mortgage packages. Cov-lite loans require fewer restrictions on collateral, repayment terms and income level from the borrower.