So can it be done? What are your options?
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Types of business
Businesses can usefully be divided into various types. Each has different opportunities and faces different challenges. Before we look at potential sources of funding it will be helpful if you identify which classes your business fits into. There may be several.
The definition of what is a small business various from country to country and, in some cases, from industry to industry. They are usually measured in terms of the number of employees working in the business and/or the annual turnover (revenue) of the business.
In terms of workers, definitions of small businesses range from fewer than 15 employees in Australia, 50 employees according to the definition used by the European Union, and fewer than 500 employees in the US.
In terms of turnover, the range is just as great.
However, all this is usually only relevant in terms of government support (grants, special allowances etc) and the way the business will be taxed.
Perhaps more in line with common experience is the EU classification:
- Micro Business = fewer than then employees & turnover under €2 million
- Small Business = fewer than 50 employees & turnover under €10 million
- Medium Business = fewer than 250 employees & turnover under €50 million
When it comes to funding, we will look in this guide at Micro Businesses and Small Businesses, as defined above.
Businesses that have been established for some time
Generally, the test of whether or not you will be treated as an established business is whether you have been trading for (and can produce official accounts) for more than three years. In some places it is more often five years.
Seeking funding for a new business is different from looking for money if your business has been trading for some time. It may not be harder but it will involve different lending sources.
“Startups” as they are often called, have no strict definition. They are businesses at the early stage of development. They are often (but by no means always) in some way driven by technology and they are usually trying to develop a business model that can grow quickly and become very profitable.
A whole industry has emerged to fund startups.
Businesses based in the country where you have been a long-term resident
If you have lived in the place you are doing business for some time you will – not surprisingly – usually find it much easier to raise money.
In practical terms, the point at which it gets easier is when you have lived in a place for more than five years: 10 or 20 years is even better.
Businesses based in a country where you are a recent arrival
Would you want to lend to someone who had just arrived in town, probably didn’t speak your language, knew nothing about your business culture and has no credit record? Oh yes: they also want to borrow money for a brand new business venture. I wouldn’t.
Your best bet is often to seek funding “back home”.
Businesses that own assets
If your business owns assets – buildings, trucks or even (in some cases) intellectual property rights – this can create security that can be offered to your lender to “guarantee” the loan.
This can make borrowing easier but the assets have to be of substantial value and ideally, readily saleable if you don’t make your loan payments.
Businesses with existing borrowings
This is a mixed blessing. The good news is that somebody has already be persuaded to lend you money. The bad news is that borrowers will worry about the extra cost that you will have to meet in order to service any new loan.
Your existing lender can often be your best source of further borrowing.
Businesses where the owner can provide guarantees for any borrowing
This is a bit like the business having assets to use as security – but better. However, the person offering to give the guarantee must be financially strong.
It can be hard to find a lender prepared to accept a guarantee from someone who lives in another country.
Businesses that produce goods
Goods have value and can be used as security for loans. However, this can – in practice – be complicated and/or expensive to arrange.
Potential sources of funding
This is the crucial issue.
We are, of course, dealing in this guide specifically with borrowing by international businesses.
Small & micro businesses
New businesses (startups)
Your own funds
Over 90% of startups are self funded, certainly for the early stages. This is also called bootstrapping. Funding the early stages of your business using your own money also encourages others to lend to you later: you have “flesh in the game”.
It may take a bit longer to start the business this way and then longer to grow it organically, but the advantage is that you don’t have to give up any equity or control. Your business is yours. If it succeeds, you will be rich!
Professional investors will usually expect that you have already have commitments from family and friends. This is to show your credibility. After all, if your friends and family don’t believe in you, how can you expect outsiders to jump in? This is the primary source of non-personal funds for very early-stage startups.
“Partnerships” or “Sharing Equity”
You are likely to have more time than money. Other new businesses will be much the same.
You have space space in your office? Allow another new business to use it in return for doing website design for you. You have IT skills? Get an accountant to keep your accounts for free in return for maintaining their computer system.
This can not only save you a lot of money but it can also lead to long-term business partnerships.
Can you find a potential customer who has enough confidence in your product or service that they are prepared to pay you up-front for those services, knowing that they will have lost their money if you don’t make it. This website was partly funded in that way.
It’s surprising how many grants are available. Research the possibilities thoroughly
For the early stages of a business, forget it.
A few years ago, if you put in some of your money and you had a good business plan most banks would offer some support. Sadly, in most places no more.
If you have lots of relevant experience, a good plan and are putting in lots of your own money you may find them more receptive.
However, it’s still worth asking. The mere act of preparing a proper application and business plan is a worthwhile exercise – even if you are refused. Just don’t be surprised if they say “No”.
Many places have groups of local high-net-worth individuals interested in supporting startups, and willing to put together quite large amounts to support businesses where they think there is a high probability of success. Search online.
These are professional investors whose business is investing money – often institutional money entrusted to them – in promising startups. These are, usually, business run by people with relevant experience, with a proven business model and ready to scale-up quickly. They typically look for big opportunities, needing a million dollars or more. Search online but an introduction often helps.
This relatively new source of funding is typically organised online. Search for crowd-funding sites in your area.
Even though it is an online operation, many of the best crowd-funded opportunities have been local to where the business is operating.
People’s motivation for putting money into crowd-funding opportunities varies. It is often not mere profit. Often ‘fringe benefits’ – such as free membership of your new gym or 30% discount in your restaurant – help attract funding.
Strangely, established small businesses – especially established micro-business – can be as difficult as or harder to fund than startups.
It can be expensive – and it can take a long time before your investment in expansion shows up as extra profit. So an essential initial step is to do the numbers. Is expansion really a good idea? Professional advice can help here.
Assuming you are going for it:
Your own funds
You may already have spent all your own money on your startup but, if you have been operating for a few years, you may have some retained profit to invest. If you haven’t, expect other possible sources of funding to ask why.
Expect to have to put something in yourself if you want others to invest.
Money you have access to
A local clock repairer doubled the size of his (very) small business using US$7,000 from his credit card. He had new business already lined up: he just needed to fund it for a few months.
Others have sold assets (the wife’s car!) or remortgaged their home.
Again, expect to have to put something in yourself if you want others to invest.
As with startups, family and friends are a good source of expansion funding.
Their terms can be fair and flexible.
Remember that, if it doesn’t work, you could lose a lot of friends! Be clear and honest about risk and reward.
The business’ own money
This is the obvious way of funding expansion. You want to expand your business because it is doing well. However, this can be slow and – if you are too ambitious – it can denude your business of necessary capital and so damage it.
Some companies have benefited greatly from government support for their overseas expansion. Programmes designed to bolster such efforts can be commonplace.
A Google search may come up with organisations in your country. For example, see here for loans from the EU, here for Canada, here for specialist funding from the US and here for loans from Australia.
It is easy to forget that banks exist to lend money. No loans means no profits. However, recently borrowing from banks has been difficult in most countries.
If you are looking for bank finance spend time looking very carefully at what is available in the country where you want to borrow. See our country-by-country guides for details.
There are usually three main types of money available.
This is a facility to borrow a certain amount from a bank as and when you need it. It is not intended for permanent – “core” – funding.
In many countries, failure to comply with the terms of your overdraft can cause serious damage to your business. In some it is a criminal offence.
Short/Medium Term loans
These are, typically, loans for three to five years, repayable by instalments that pay back the interest charged and instalments of the amount you borrowed. In some cases these loans can extend out for 20 or 25 years.
In many countries, failure to pay back your loan can cause serious damage to your business. In some it is a criminal offence.
Longer term – often secured – loans
Long-term finance is quite rare for small business.
It is most likely to take the form of a mortgage over any premises owned by the company.
These are loans to get you over a particular problem. For example, if you have a very large order and need extra capital to buy more materials.
Generally, your lender will need to know you and the business well before considering such a loan.
Leasing is a type of loan under which you pay for something – such as a new truck – by instalments. Until you have paid in full, the truck usually remains the legal property of the company lending you the money.
Debt factoring/loans secured against receivables
Loans secured with receivables are often used to finance growth, with the banker lending up to 75% of the amount due on invoices you have delivered to customers.
Loans secured against stock/inventory
Inventory (stock) used to secure a loan is usually valued at up to 50% of its sale price. Again, your lender will want to know your business well before agreeing this type of finance.
Letters of credit
International traders use these to guarantee payment to suppliers in other countries. The document substitutes the bank’s credit for yours up to a set amount for a specified period of time.
If you are a seller, this means you will definitely get paid – provided you comply precisely with the terms of the letter of credit.
If you are a buyer, this means the international seller will be more likely to sell to you.
This type of finance can be expensive and complex to set up.
Loans can be secured or unsecured. An unsecured loan has no collateral pledged as a secondary payment source (“guarantee”) should you default on the loan. The lender provides you with an unsecured loan because it considers you a low risk.
A secured loan requires some kind of collateral (“security”) but generally has a lower interest rate than an unsecured loan. The collateral is often related to the purpose of the loan; for instance, if you’re borrowing to buy a computer system, the system itself could serve as collateral for a loan lasting just a year or two.
For Muslims, the idea of paying interest on a loan is unacceptable. So there are often local alternatives that provide the finance in ways that are “Sharia compliant”.
Businesses based in the country where you have been a long-term resident
If you are running a business “back home” and want to go international by trading with another country, your funding options will lie firmly in the place where you are based. It will be extremely unlikely that you will receive funding in the new country where you are starting to do business.
There can be surprising amounts of grant aid available in your own country to seed international expansion and there are venture capitalists who are keen on this type of project but otherwise your options will be pretty much the same as if you were funding domestic growth of your business. Some time spent doing research will be well spent.
Businesses based in a country where you are a recent arrival
If you are starting a new business in a country to which you have just moved you face the hardest task of all. Hard but not impossible.
The means of finance open to all startups are available to you.
In addition, many people “cheat”. If they decide to leave their well paid job in (say) Germany in order to open a business in (say) Spain, they will plan in advance.
They will borrow money back home, before they leave their job and whilst they can still show the lender a long established source of substantial income. They might, for example, take a €30,000 bank loan – “to install a new kitchen”. They might also take out a mortgage in the place they are moving to in order to buy a home there: a home that will often also serve as their business premises.
They can do this only because they “forget” to tell the lenders that they are going to give up work and move to another country. That’s the problem. In many countries, this is illegal. You have a duty of full and frank disclosure when dealing with your bank. In the worst cases, obtaining money in this way could be interpreted as fraud.
Nonetheless, this is widely done. You have been warned!
The New World model
There is a new approach to funding business expansion. It started in the US but has been copied elsewhere.
It is, really, part of the whole startup culture.
Investors realise that there is (potentially) huge money to be made out of international growth. Think Starbucks, Amazon, Uber etc. Of course, many of the ventures will fail but if you are good at choosing the right businesses with the right management teams and you spread your risk amongst several ventures, this can be very profitable.
So they provide funding, often taking substantial equity stakes in the company.
They are, generally, looking for:
- Business models that have already been proved in another country and which seem equally applicable in the destination country
- A strong management team, centrally and locally
- Adequate funding
- A need for a large investment: usually several million dollars
- A robust business plan
- An exit route
If your business has these ingredients, this type of financing is worth investigating. It won’t help if you want to open a bar in Benidorm or a dentist’s office in Durban.
Example 1 – Switzerland – August 2015
pCloud, a Swiss based cloud storage service founded in 2013, raised US$3million to to expand its partnership network and build representative offices in Western Europe, the United States and selected emerging markets.
This was the first time pCloud had received funding of any kind, and this came entirely from private investors with a strong IT background.
Example 2 – Israel – September 2015
Crosswise, a startup data collection company based in Tel Aviv, has obtained US$3million funding to break into new markets, particularly China and Western Europe.
It only opened its doors in late 2014.
Crosswise has 18 employees, 14 are whom are in technical and engineering roles.
Example 3 – Scotland – October 2015
Aberdeen based oil services company Meta Downhole (another great name!) specialises in the production evaluation services used during well construction and production. It already has offices in Norway, Australia and Qatar. It is targeting sales growth in the Middle East and Asia-Pacific
It has a lot of experience, sold existing financial backing (from venture capitalists) and patented technology.
It has secured £5million (US$7.5million) from the Scottish Loan Fund (“SLF”).
The SLF was established, with Scottish Government backing, to address a need for additional debt finance for small and medium-sized enterprises.
Example 4 – UK (but US inspired)- November 2015
Deliveroo (another great name), a UK on-demand delivery service for restaurants, was co-founded in 2013 by William Shu: “I formulated the idea for Deliveroo because I was consistently dissatisfied by London’s takeaway options. In New York, where I previously lived and worked, I was able to enjoy food from all my favourite restaurants at home. In the UK, the option just wasn’t available – and it became my mission to change that.”
In July 2014 – as a virtually new startup – they raised £2.75m to back an expansion of its offering across the UK and internationally
In January 2015 they raised a further $25 million (£16.55m) “to bring its upmarket takeaway service to more cities across the UK”.
In July 2015 they raised US$70m from investment funds “to ramp up international expansion”.
In November 2015 the company announced that it had raised a further $100 million in new funding, just a few months after closing the $70 million over the summer. This was to expand its service to Dubai, Hong Kong, Singapore, Melbourne and Sydney, giving it its first footprint outside Europe. They now operate in 50 cities, across 12 countries
This extraordinary story shows what can be achieved – though you have to ask how a food delivery business has spent $200million on development! Clearly, you need a good name. It also, no doubt, helped that the founders’ background was in finance and so they probably already had connections.
More modest businesses
Of course, you may have no desire to raise millions of dollars or to grow this big. You may be looking for a business to help support your new life in a country where it would be difficult to get work or a business that will allow you to downsize and de-stress.
In these cases, you are probably going to have to depend, largely, on your own money and that of family and friends; at least until the business has built up a track record. However, don’t ignore crowd funding. I know of several bars and restaurants part funded by customers and an estate agency in Spain where a happy customer bought half the business.
I have mentioned business plans. If you want to obtain finance you will need one. It will need to be in the format expected by the person you are approaching for money: different styles and content are expected in different countries. See our Guide to Starting an International Business for for information about this. See also our country specific guides to starting business in the various countries we cover.
You may well find that professional help is useful when seeking funding. This is both as a source of contacts and to help you put together your applications.
Be careful. There are, unfortunately, a large number of dubious companies operating in the field. They will ask for fees and never produce anything for you. always ask for (and take up) references – though it is sometimes difficult to know whether even the referees are genuine.
A starting point may well be your lawyer or accountant in the country in question. They, almost certainly, won’t be active in this field but they may well know someone who is – and asking costs nothing.
Which works best?
Surprise, surprise. There is no simple answer.
Nobody is waiting in the wings to throw money at you just because you have a new and clever business idea.
On the other hand, there are still lots of options available. If you want to build a business, think seriously about each of them.
Of course, every alternative has advantages and disadvantages, so some of them may not appeal to you. Just as importantly, many may simply not be available to you because of your personal circumstances or your business plan.
As is so often the case in our LawOverseas guides, we need to urge caution.
Starting a business in a foreign country or doing business with a foreign country can both be great ideas. Both will need finance. Often, you will need to raise external finance: especially if you hope for rapid expansion.
Be careful who you approach.
Be even more careful who you deal with.
- Don’t sell your soul to someone you don’t think you can work with.
- Be clear about just what you are prepared to give up in order to get the money: control? Design? Business culture? Ownership?
- Be realistic. Anyone prepared to invest in you is going to want a big chunk of reward if your business is successful.
Obtaining funding for your international business is hard work. Perhaps that is a good thing. It certainly makes you think carefully about what you want and why: about how you expect your business to operate.
Many successful small businesses have been set up by people who have recently arrived in a new country. Many more are still based back home but now operating internationally. Almost all of them have had to raise money – at least once – in order to do so.