Globalization has opened doors for international financing and opportunities that were never explored before. Activities of companies are not limited to one region or a single country. And wherever there are activities of companies, there is money involved in them. Let’s understand the world of international financing.
International Financing is also known as International Macroeconomics as it deals with finance on a global level. There are various sources for organizations to raise funds. To raise funds internationally is one of them. With economies and the operations of the business organizations going global, many companies have an access to funds in the global capital market.
Organizations engage in cross-border transactions with foreign business partners through the help of International finance. Customers, investors, suppliers and lenders engage in various international sources from where funds may be generated include the following.
(i) Commercial Banks
Global commercial banks all over provide loans in foreign currency to companies. They are crucial in financing non-trade international operations. The different types of loans and services provided by banks vary from country to country. One example of this is Standard Chartered emerged as a major source of foreign currency loans to global industry. It is the most used source of international financing.
(ii) International Agencies and Development Banks
Many development banks and international agencies have come forth over the years for the purpose of international financing. These bodies are set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The more industrious among them include International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.
(iii) International Capital Markets
Emerging organizations including multinational companies depend upon fairly large loans in rupees as well as in foreign currency.
Choice Of The Source Of Funds
Short-term borrowings offer the benefit of reduced cost due to the reduction of idle capital, but long-term borrowings are considered a necessity on many grounds. Equally, equity capital has a role to play in the scheme for raising funds in the corporate sector.
It is recommended to use combinations of sources as no source of funds is devoid of limitations, instead of relying only on a single source. The factors that affect the choice of source of finance are discussed below:
There are two types of cost, the cost of obtaining of funds and cost of utilizing the funds. Both these costs should be considered while deciding about the source of funds that will be used by an organization.
(ii) Financial Strength
In the choice of source of funds, business should be in a good financial position to be able to repay the amount and interest on the borrowed amount. When the earnings of the organization are not stable, fixed charged funds like preference shares and debentures should be carefully selected as these add to the financial strain on the organization.
(iii) A form of Organization and Reputation
Type of business organization and reputation in the market influences the choice of a source for raising money. A partnership firm, for example, cannot raise money by issue of equity shares as these can be issued only by a joint stock company.
(iv) Purpose and Duration
Business needs to plan according to the time period for which the funds are required. A short-term need can be met through borrowing funds at a low rate of interest through trade credit, commercial paper, etc. For long-term finance, sources such as the issue of shares and debentures required. Also, the purpose for which funds have required the need to be considered so that the source is matched with the user.
(v) Risk Involved
Business evaluates each of the source of finance in terms of the risk involved while issuing them. For example, there is the least risk in equity as the share capital has to be repaid only at the time of winding up and dividends need not be paid if no profits are available. Whereas, a loan has a repayment schedule for both the principal and the interest. The interest is required to be paid irrespective of the firm earning a profit or going through loss.
(vi) Control over Management
A particular source of the fund may affect the control and power of the owners on the management of a firm. The issue of equity shares may mean a dilution of the control. For example, as equity shareholders enjoy voting rights, financial institutions may take control of the assets or impose conditions as part of the loan agreement.
The reliability of business on particular sources may affect its creditworthiness in the market. For example, issue of secured debentures may affect the interest of unsecured creditors of the company and may adversely affect their willingness to extend further loans to the company.
Another important aspect affecting the choice of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation, and documentation in case of borrowings from banks and financial institutions, for example, may be the reason that business organizations may not prefer it if other options are readily available.
(ix) Tax benefits
Various sources may also be weighed in terms of their tax benefits. For example, while the dividend on preference shares is not tax-deductible, interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organizations seeking tax advantage.
It has to be borne in mind that Havelet Finance Limited remains a backbone and a cutting edge funder to global companies via their international Finance program. A lot of companies have benefited through our organized funding scenario at affordable 2% interest rate annually. To get started for all trans boarder financing, give Havelet Finance Limited a trial.