What is Cross Border Funding and How Can it Benefit Your Business?

Cross Border Funding can understandably feel a little overwhelming, both from an accounting and a legal standpoint. However, is it worth the trouble for your company, today? And if yes, how do you access it? What is there to keep in mind? Let's find out:

We're going to go over these topics:

2. The Best Current Cross Border Funding Option

3. 5 Key Takeaways from the CEO’s Perspective 

4. Conclusion

What is Cross-Border Funding 

Cross-border funding is not different from other fundings, apart from the fact that you will seek it from a source outside of your national borders: it ranges from foreign investment, international loans, cross-border M&A’s etc.

Anything which involves cross-border transactions is going to be more of a challenge than doing it domestically: different legislations, you’re less familiar with the market, etc… 

So, the only legitimate reason is usually acquisition, as well as hiring staff from some other countries, which can be beneficial for reasons such as tax and employment legislation. 

As such, cross-border funding is more a symptom than a cause. 

What are the inherent benefits of cross-border funding? And their drawbacks? 

a) Benefits 

• Increased access to capital: By opening up to foreign investors, businesses can tap into a larger pool of funding than what may be available domestically. 
• Diversification of funding sources: By not relying solely on domestic funding sources, businesses can mitigate risk by spreading out funding sources across multiple countries and currencies.  

For example: Let’s take an imaginary business that has a US dollar loan but generates pound sterling revenues. The fluctuation in currencies can make your loan payment larger or smaller. Matching currencies for a loan provides stability but can also be used to facilitate repayment 

• Exposure to new markets: Cross-border funding can provide businesses with opportunities to expand into new markets and access new customers.  
• Some foreign markets have more expertise in funding your specific product: You can get a step ahead of your domestic competition by using the services of consultants based outside of your domestic market. Other markets have developed your products and have the expertise to implement your business strategy in your local market.  

For example: The Micro-mobility sector spurred out of Europe and started to spill over to other markets such as SEA.  

• Your product can be more soluble in a different jurisdiction: Not only can you gain exposure to new markets, but this other market can be more attracted to your product as such. 
• You can benefit from tax-friendly regimes: For example, the U.K. is quite favourable to fintech 
  

b) Drawbacks

• Difficulty in understanding and navigating foreign regulations: The procedures you might have to navigate in case of default, or even during drawdowns, might complexify because of the nature of your cross-border funding. You might need special accounting and legal expertise to mitigate it.  

For example: Specific rules about what one can pledge as securities apply in specific local jurisdictions.  

• Currency risk and fluctuation: Tends to have a lesser impact when dealing with strong currencies like the pound or the euro, though they are not averse to fluctuations. This is the other side of the same coin as in the advantage section.  
• Political risk: Political turmoil might create turmoil and changes in cross-border legislation, as well as disrupt currency flows. 
• Business practices and cultural differences: Though mitigated by the global uniformization of business practices, it is still one of the most important drawbacks of cross-border funding. 

The Best Current Cross-Border Funding Option 

With mid-market, high-growth businesses expanding their operations offshore, generally you’re going to prefer a loan facility. 

Cross-border loans are loans that are extended to a borrower in one country by a lender in another country. These loans can be syndicated, it’s beneficial for borrowers who are looking to raise substantial amounts of capital, as it allows them to tap into a wider pool of lenders. 

Cross-border loans are often used by multinational corporations, governments, and financial institutions.

It's important to note that cross-border loans may be subject to different regulations and lending standards, which can make them more complex than domestic loans. 

However, if they allow your expansion in the right direction, they're definitely an option to consider, especially in the current market:

Regulatory frameworks in cross-border financing have been particularly favourable to private lenders, when funding middle-market borrowers since 2019. Particularly so in M&A procedures. This relative easiness is a great instrument to use before more regulations kick in. 

This has developed in parallel with, and thanks to, covenant-lite deals which have swarmed the private debt market. They allow to somewhat bypass cross-legislation complexities. 

5 key takeaways from the CEO’s perspective 

There are key takeaways for why you should go for a cross-border funding facility as a CEO. 

Takeaways: 

1. Access to capital: Cross-border funding can provide access to a wider pool of investors, which can be especially beneficial for companies that are looking to raise large amounts of capital. This can also help companies diversify their investor base and reduce their dependence on any sole source of funding. 
2. Cost savings: By accessing capital from other countries, companies can take advantage of favourable exchange rates and interest rates, which can help them save money on their funding costs. 
3. Risk diversification: Cross-border funding can also help companies diversify their risk by tapping into different markets and currencies. This can reduce the impact of any single economic event on a company's financial performance. 
4. Greater investment opportunities: cross-border funding allows companies to explore new markets and opportunities for growth, which can be especially important for companies in emerging markets and those looking to expand internationally. 
5. In some cases, it allows companies to take advantage of regulatory and legal frameworks which can be beneficial for companies 

Conclusion 

Cross-border funding can provide significant benefits for businesses, but it is important for leaders to carefully consider the challenges and be aware of the resources available to them. 

Therefore, understanding the benefits of cross-border funding can be crucial for executives who are looking to grow their companies and manage their financial risk.