There are many sources for companies to raise funds; raising funds internationally is one of them. Globalization has opened gateway and space that was never analyzed before. Financial Activities of organizations are not restricted to one region or just one country.
International financing is a method to boost shareholder’s wealth. Features of international financing include political risk, foreign exchange risk, market imperfections, and expanded opportunity sets. Because of the recent changes due to increasing globalization and trade liberalization, it has become beneficial because it helps to know the consumption pattern of an individual economy, learn where and how to invest and since the production.
It helps companies to engage in cross-border transactions along with foreign business partners like investors, customers, lenders, and suppliers.
While doing business internationally, a business firm has to be very cautious as compared to doing it within the country because you will have to be careful about the currency as it impacts almost all the fields of the business starting from your purchase, supplies, investing in the assets, taxes, etc. In a multinational company, financial managers have many choices to raise funds. When there are many options it becomes all the more difficult to evaluate all the options and see the risk involved and choose the best one for your business.
There are many sources to raise funds. Let’s see- what are the things to consider while choosing the best source of funds for your company:
1) Cost- Mostly two types of cost are there which are to be considered while choosing the best one, they are obtaining funds and utilizing the cost of funds. When deciding the source of funds for your organization, make sure that you analyze both the things before selecting the best one.
2) Financial Strength- When you are choosing a source of fund, you should always keep in mind about the financial strength, as your monetary status should be good and in a situation to repay the amount and the interest of the token amount. If the company’s financial status is unstable then fixed charge funds like debentures and preference shares should be chosen diligently as it might add to the financial burden to the organization.
3) Reputation- What kind of business organization you run any sort of reputation you have in the market, would influence the choice of source for raising money. For example, a partnership firm would not be able to raise money by issuing equity shares as they can only be issued by a joint stock company.
4) Purpose- An organization requires planning that for what time period funds would be needed. Short term requirement can always be met by borrowing money at less rate of interest with the help of trade credit, commercial paper and many more. If we talk about long-term needs, they can be met by issuing of shares and debentures. The main thing to look for is your purpose for which you need the funds as user’s requirement should match with the source.
5) Risk- A good businessman should always evaluate the risk involved with each source of finance before issuing them. For example, financial advisors say that there is less risk in equity because the share capital needs to pay at the time of winding up and the dividends are not required to pay if there is no profit. On the other hand, if you take a loan there is always a repayment plan for the principal and interest amount. And you will have to pay interest irrespective of the company earning profit or bearing loss.
One more risk that many firms miss out on is a political risk as there are many unforeseen government activities or events that can hamper your decision.
6) Management of the firm- A distinct source of the fund might affect the power and control of the holder on the management of the company. Issuing equity shares might mean the dilution of control. An example of it is that mostly equity shareholders enjoy their voting rights. Financial institutions might take charge of the assets or enforce conditions as a factor of a loan agreement.
7) Creditworthy- The dependability of a firm on some particular source might influence its creditworthiness in the market. Such as issuing of secured debentures can also affect an interest of some unsecured creditors of the firm and might badly disturb their decision to prolong further loan to the firm.
8) Flexible- One more important thing that can affect the elect of finance is the ease of getting funds and flexibility. A detailed investigation, restrictive provisions and requirements of too many documents in regard of taking funds from financial institutions and banks can be one of the logic that business firms might not adopt it and go for other options which are easily available.
9) Tax- Last but not the least, one of the important factors to consider is a tax, as every country has the different type of taxes and has different tax slabs according to the income, for example, corporate tax in Glasgow can be different from some other country. Some people before raising funds also check them in respect of their tax benefits. Like dividend on the preference shares is not tax- deductible, the interest that is paid on debentures and loans is taxable; that is the reason it is preferred by companies which are looking for tax benefits.
These were a few things a business organization should always consider before raising funds. There are many benefits that a company can have if it goes global as they also tend to aid from the business opportunities available there. They can always raise money from the market where the cost of capital is less plus they can also benefit from big economies of scale if they operate internationally. An organization can also utilize the services pertaining to international corporate finance in Glasgow when professional assistance is needed.
International financing features exchanging of the currencies globally with a healthy competitive spirit, which keeps the export to import rate as wide as possible in a constant way for the country’s financial strength and growth in comparison with different countries of the world.