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Foreign Direct Investment: How do I finance my U.S. facility?
March 10, 2017
You have had a successful business in your home country location and perhaps have established operations outside your home country. Most likely, you have begun to sell into the United States via exports, or have pending contracts that warrant a U.S. expansion outlook.
What happens when you decide to physically locate to the USA & seek financing for your business?
Whether you are looking at a three-person sales operation, a 15-person distribution and/or service center or a full-fledged assembly or manufacturing operation, reliably financing the business is a key consideration.
What should you be prepared for?
First, plan on the first two years to be largely financed by the strength and resources of the parent company. This can take several forms, and the list below is not exhaustive. Be sure to check with your legal, tax and other advisors before deciding on what is best in your specific situation (intercompany loans can have different tax consequences in some cross-border situations versus a cross-border loan from a bank).
- Option 1: Finance the U.S. operation with an equity (cash) infusion from the parent company.
- Option 2: The parent company arranges to extend an intercompany loan.
- Option 3: The parent company’s house bank extends a loan with or without direct parent support.
- Option 4: Ask your U.S.-based bank to extend a loan (or lease for equipment) under a parent guaranty.
- Option 5: Arrange for a standby letter of credit to be issued by your credit-worthy house bank with the US-based bank as beneficiary. The U.S.-based bank then extends credit with this house bank support.
While the most costly alternative might be the last option, this option is one that I used most often as a banker in situations where the desire was to have a credit facility put in place in short order. Banks will often acknowledge the extra cost the parent is sustaining for the L/C (letter of credit) and may reduce their lending rates to better reflect the risk of the issuing bank versus the risk associated with either the local operation or parent. It is very common, after a couple of years of successful operation, for a foreign-owned subsidiary to seek or consider supplemental local financing. At this stage, local area banks may be able to provide “secured financing,” with no formal reliance on the parent. While more expensive, this provides the local operation with some additional funding alternatives and gives it a bit of independence as it grows.
Credit extension by the banks might be supported with the bank taking a secured interest in receivables, inventory, lien-free buildings or land. Most banks also indicated that in addition to the business financing needs, they are eager to discuss and find ways to assist with the personal financing needs of the key officers locating to the region. Each situation is unique, and virtually all the banks want to work with those locating here to find workable solutions.
Best Advice?
“Pick your support partners carefully, and have conversations early in the process.” The Greater Richmond Partnership’s Global Assistance Program can provide free and early access to the various support entities you will want to speak with should the Richmond region be on your location list.
In selecting a bank partner, be sure that the bank selected can properly deal with incoming foreign wires. Some banks (for example, a direct correspondent to the parent company’s bank) do this much better than others.
You do not want to spend hours trying to track down the status of your money transfer. In addition, it is recommended to establish a relationship with more than one bank. Your bank for international affairs should also be able to offer a good information reporting system, allowing your authorized parent officers the ability to see or monitor account activities here.
- Topics:
- Advanced Manufacturing
