Financing issues for overseas businesses

Funding is an issue that must be faced and overcome in overseas business. Companies need huge amounts of money to expand overseas and procure from themselves and financial institutions. However, in the face of enormous capital requirements, companies with limited financial resources and creditworthiness sometimes stumble at the entrance to overseas business and give up going overseas. Let’s look at the first barrier to foreign business financing.

Large amounts of capital are required for overseas business.
Types of financing methods for overseas businesses
Tax rates that vary depending on the funding method
Summary

Large amounts of capital are required for overseas business.

Overseas expansion is more expensive and requires a large budget than developing a new business in Japan. This is because overseas countries are more distant and costly to just go there than to open branches, branches or subsidiaries in Japan. They also have limited access to information and will spend a lot of money getting the information and support they need to do business, including communication issues. From this point of view, the cost is expected to be high, and the budget will swell.

In order to expand our business overseas, we start by considering where, what kind of products and services, and how to provide them. To do this, you need the information to select. However, there are few things you can get from the Internet, so you need to buy information from a specialized agency or ask them to do research for you.

As the plan progresses, we will be able to broaden the scope of our operations, including local research, local partner search, marketing strategy, selection of local staff, and recruitment activities, each of which will require funds. It is said that “human” “know-how” and “money” are necessary for overseas business, but “money” is an important role to obtain “human” and “know-how” and funds are necessary as the foundation.

The money you put in advance can be recovered when your business is successful. But to be successful, you need to be well funded. In other countries, there are risks such as wars and revolutions that are not so common in Japan, and unavoidable failures are also possible. All companies will need to raise sufficient funds without difficulty, taking into account the risk of collection and the stability of the head office.

Types of financing methods for overseas businesses

There are several ways to raise funds to start a business overseas.

Cross border loan

It is a method of direct financing from domestic financial institutions to overseas subsidiaries. The funding rate is based on the interest rate paid in Japan and there is no foreign exchange risk in the case of a local currency. The parent company’s guarantee is required.

Utilization of subsidies and subsidies

It is conducted by the national or local government or other public organizations. Although the terms of use are stipulated, it is possible to procure funds in an advantageous manner by providing support such as low interest, no repayment obligation, and information provision.

Standby credit

It is a way to get loans directly from local financial institutions by issuing a letter of credit to overseas financial institutions. Even if there is a letter of credit, there will be an examination at the time of borrowing.

Investment from venture capital firms

It is a way to receive investment from venture capital, an investment company aiming at high return from high-growth companies and businesses.

Parent-child loan

This is a loan from the parent company to a subsidiary. The interest rate is based on the funding rate of the parent company and the repayment is made by foreign remittance.

Reference:
Japan Finance Corporation “standby credit system”

Tax rates that vary depending on the funding method

When doing business overseas, the head office will provide funds to overseas branches, branches or subsidiaries. Funds are basically transferred from the head office to overseas bases when they receive loans or subsidies instead of their own funds. When funds are transferred from the head office to overseas subsidiaries, the tax effects of investments and loans vary. Therefore, it is necessary to respond to changes in the host country and its tax system.

If you establish an overseas subsidiary, you can invest in it in two ways: by equity or by financing. When an overseas subsidiary makes an investment, it pays a dividend to the parent company, and in the case of a loan, the subsidiary pays interest to the parent company. Interest is deductible from subsidiaries and the profit of the parent company, while dividends are not deductible from subsidiaries or the profit of the parent company. Therefore, in a country with low tax rate, you can save corporate tax by choosing investment. On the contrary, in a country with high tax rate, it will lead to tax saving as a loss.

However, this calculation focuses on tax issues. Actually, it is necessary to judge carefully for each country such as tax treaty.

Summary

Overseas business requires a huge amount of financing. Lack of funds can slow the progress of the plan and result in poor business performance due to lack of preparation, so it is essential to find effective ways to raise funds. There are many ways to procure, so it’s a good idea to carefully consider what’s available to your company.