If you are a large US business looking to grow internationally, you already know how challenging it can be to secure the right funding. Whether entering new markets, expanding operations, or dealing with currency risks, getting the right cross-border financing is key to making it all work.
The world of international finance can be complex, but it does not have to be overwhelming. There are three main types of cross-border financing you will need to know about: debt financing, equity financing, and trade financing. Each option comes with its own set of benefits and challenges. The real trick is knowing which strategy will fit your needs and help you manage risks while keeping your operations running smoothly across borders.
In this guide, we will walk you through each type of financing, explain how they work, and share strategies for making them work for your business. With the right approach, you can unlock new opportunities, reduce financial risks, and ensure your company stays competitive in the global market.
Understanding Cross-Border Financing: The Basics
Cross-border financing is just a fancy term for raising money to fund your business activities in markets outside of the US. Whether you’re borrowing money or selling equity (ownership stakes) to investors, the goal is simple—to get the funds you need to grow your business internationally.
Let us simplify the idea using an example scenario: Think about it. If your company, let’s say TechCo, wants to expand its product line into Europe, you’ll likely need additional capital. However, borrowing from a US bank might not be the best option since you’ll have to deal with exchange rate risks and higher costs. Instead, cross-border financing lets TechCo tap into global markets, raising funds from international sources, making the whole process easier and more cost-effective.
Now, imagine you are TechCo’s CFO looking at a big opportunity in Germany to launch a new software. You know the local market well but need €10 million to make it happen. Instead of going through a traditional loan, you might look into debt financing options in Europe or find investors from other parts of the world.
Types of Cross-Border Financing
When you are exploring options for cross-border financing, there are three main types you should know about: debt financing, equity financing, and trade financing. Each one serves a different purpose and comes with its own set of benefits and challenges. Still, they offer valuable ways for US companies to expand globally and manage financial risk.
Let us break each one down so you can see exactly how they work and how they might be useful for your business.
1. Debt Financing: Borrowing Money Across Borders
Debt financing is essentially borrowing money from an international lender or issuing bonds in foreign markets. In return, your company agrees to repay the loan (or bonds) over time, usually with interest. This type of financing is ideal if you’re looking to raise capital without giving up ownership in your company.
How it works: Suppose your company, GlobalTech, wants to expand into the Asian market. Rather than using your internal capital or taking out a loan from a US bank, you might issue bonds in Japan. Investors in Japan will buy these bonds, giving GlobalTech the funds needed to grow. Over time, GlobalTech repays the bondholders, plus interest.
Debt financing gives companies access to more capital quickly but requires a clear repayment plan. The key risk? Currency fluctuations. If GlobalTech raises funds in yen, and the yen’s value drops against the US dollar, repaying the loan can become more expensive. This is where currency risk management strategies, like hedging, come into play.
2. Equity Financing: Selling Ownership to Global Investors
With equity financing, you sell shares of your company to international investors. These investors gain partial ownership of your business in exchange for the capital. This can be a great way to raise significant funds without taking on debt. However, it does mean you’ll need to share decision-making and profits with these investors.
How it works: Imagine GlobalTech is looking to expand its operations into the European market. Instead of borrowing funds, it could sell a portion of its shares to European investors on the London Stock Exchange. These investors would then own a piece of the company, and in return, GlobalTech would gain the funding needed for its expansion. As the company grows and profits increase, shareholders would also benefit.
One of the main advantages of equity financing is that you don’t have to pay the money back like you do with debt. However, giving up equity means sharing control and a portion of your future profits. If GlobalTech is a fast-growing company, this could be worth the trade-off.
3. Trade Financing: Ensuring Smooth International Transactions
Trade financing focuses on supporting the purchase and sale of goods across borders. This type of financing helps companies ensure they have enough working capital to complete international transactions, manage vendor payments, and reduce the risks of dealing with global vendors.
How it works: Take GlobalTech again. Suppose it needs to purchase raw materials from vendors in South Korea to manufacture its products. GlobalTech might not have enough cash on hand to pay upfront, or it might be worried about the risk of the vendor not delivering. In this case, it could use trade financing tools, like letters of credit or trade credit insurance, to secure the transaction.
A letter of credit acts as a guarantee that the vendor will be paid once they deliver the goods as agreed. Trade credit insurance helps protect against the risk of non-payment from foreign buyers. These tools give GlobalTech confidence that its transactions will be secured and its supply chain will run smoothly.
Trade financing is especially useful for businesses operating in volatile regions or those with limited working capital. It helps reduce financial risk and ensures your global transactions are protected.
Which Type of Financing is Right for You?
Each type of cross-border financing has its strengths, and the right choice depends on your company’s specific needs.
- Debt financing is ideal if you prefer to retain full ownership and control but are willing to manage repayment risks.
- Equity financing is better if you want to raise large amounts of capital without taking on debt, but it does mean giving up part of your business.
- Trade financing is essential for managing the day-to-day cash flow needed to move goods across borders smoothly.
Strategies for Effective Cross-Border Financing
Securing financing for international operations is just the first step. How you manage it can determine your success in global markets. Whether lowering costs, reducing risks, or maximizing growth, the right strategy will make all the difference.
Let us look at some key strategies to help you manage your cross-border financing more effectively.
1. Find the Right Balance Between Debt and Equity
How you mix debt and equity can make or break you when it comes to funding your business globally. Too much debt means higher interest payments and too much equity can dilute ownership. The goal is to find the sweet spot—a capital structure that gives you the funds you need without taking on unnecessary risks or giving up too much control. Keeping an eye on this balance will ensure your business stays financially stable while growing internationally.
2. Protect Yourself Against Currency Fluctuations
If your business deals with multiple currencies, exchange rate changes can hit hard. When the value of one currency goes up or down, it can directly affect your profits. To avoid surprises, many companies use hedging strategies.
These tools, like forward contracts or currency swaps, let you lock in exchange rates, giving you more predictability and less risk. Managing currency fluctuations this way helps you plan ahead and protect your bottom line.
3. Tap Into Local Financing Sources
While US-based capital markets are an option, looking into local financing in the countries where you’re expanding can be a smart move. Local banks and investors are familiar with the market and might offer better rates or more flexible terms.
Plus, financing tools like trade credit or supply chain financing can help keep your cash flow smooth. Connecting with local sources can lower costs and deepen your understanding of the markets you are entering.
4. Build Strong Risk Management Practices
Cross-border financing comes with its share of risks. Whether it is political instability, changing regulations, or fluctuating currencies, there is always something that can throw you off course. That’s why having a solid risk management plan is essential.
Using tools like political risk insurance or credit insurance helps protect against unexpected challenges. With the right risk management practices in place, you can stay prepared and keep your business on track, no matter what the world throws your way.
5. Stay On Top of Regulatory and Tax Changes
Each country has its own set of rules and tax laws, and these can change quickly. It is important to stay updated so you can take advantage of tax incentives or avoid costly mistakes. By understanding local regulations and tax policies, you can adjust your financing strategies to stay competitive and avoid surprises. Regularly reviewing these changes helps you stay compliant and ensures your financing decisions remain effective.
6. Build Long-Term Relationships with International Lenders
When you are working with lenders or investors abroad, developing strong, long-term relationships can make a big difference. By building trust with international partners, you can often secure better financing terms or more flexible repayment options down the road. These relationships also give you access to local expertise and insights that can help guide your business through unfamiliar financial landscapes.
7. Keep Your Financial Records Transparent
No matter where you seek financing, you will need to show lenders and investors that your business is financially sound. Clear, transparent financial records are key to building that trust. Make sure your financial reports are accurate, follow international accounting standards, and are easy for potential investors to review. The more transparent you are, the easier it will be to attract the financing you need to expand internationally.
Cross-Border Payment Methods: How to Make International Transactions Easy
When your business starts working internationally, handling cross-border payments becomes a crucial part of the process. Unlike domestic transactions, international payments can get complicated, with different currencies, fees, and exchange rates involved. Understanding the best cross-border payment methods can save you time, reduce costs, and help keep things running smoothly. Let us explore further.
1. Bank Transfers: Reliable but Costly
Bank transfers are one of the most common ways to send money internationally. They are secure and widely used, especially for larger sums. However, they tend to come with high fees, both when sending and receiving money, and they can take a few days to process.
While they are reliable, the costs can add up, especially if you are making regular payments. If speed and low fees are a priority, bank transfers might not always be the best choice, especially for smaller payments.
2. Payment Platforms: Fast and Convenient
In recent years, international payment platforms like PayPal, Wise (formerly TransferWise), and Revolut have made it easier and cheaper to send money across borders. These platforms typically charge lower fees and process payments much faster—sometimes instantly. They also allow you to send money in different currencies, which is a huge plus for businesses operating globally.
For smaller payments or transactions that need to happen quickly, payment platforms are often the go-to choice. Just keep in mind that some platforms charge higher fees depending on the type of transaction or the currencies involved.
3. Credit and Debit Cards: Easy, But Watch the Fees
Using a credit or debit card for cross-border payments is super convenient. They are accepted almost everywhere, and the payment goes through immediately. But here is the catch: international transactions on cards often come with hidden fees, especially for currency conversion. Plus, if you’re using a credit card, interest charges could add up quickly if you’re not paying it off right away.
Credit and debit cards are perfect for quick, everyday purchases, but for larger payments, they might not be the most cost-effective option.
4. Cryptocurrency: A New Way Forward
Cryptocurrency, like Bitcoin or Ethereum, is starting to get more attention as a cross-border payment method. It allows you to skip traditional financial institutions, making payments faster and cheaper in some cases.
The downside? Cryptocurrencies can be volatile, and not everyone is on board with using them yet. Also, you won’t always find businesses or banks that accept crypto, so it’s not as widely adopted as other methods—at least not yet.
Still, for certain transactions, especially if you are looking to avoid hefty fees or delays, cryptocurrency might be worth considering.
5. Letters of Credit: Secure, but Not Always Fast
A letter of credit (LC) is a payment method used mostly in international trade. It is a guarantee from a bank that the seller will get paid once they meet the conditions set by the buyer. This method offers a lot of security for both parties, making it ideal for high-value transactions.
However, LCs can be expensive, and the process can be time-consuming. If you need a fast transaction, a letter of credit may not be the best option.
6. E-Commerce Payment Solutions: Smooth and Efficient
If your business runs an e-commerce store and deals with international customers, payment solutions like Stripe, Adyen, or Worldpay can make life a lot easier. These platforms handle payments from customers all over the world and accept multiple currencies, all in one place.
For businesses with a lot of international customers, using a global payment platform simplifies things, so you do not have to manage different payment systems in each market. Just keep an eye on fees, which can vary depending on the country or payment method.
What Are Cross-Border Payments Used For?
When businesses work with other countries, they need to make cross-border payments. These payments are used for many different reasons. They help companies buy goods, pay workers, invest in other businesses, and much more. Let us look at the main ways businesses use cross-border payments.
1. Buying and Selling Goods Across Countries
Businesses that buy things from other countries or sell products to different countries need to make cross-border payments. For example, a company in the U.S. might buy goods from China or sell products in Europe. These payments help keep everything moving in global trade.
Without these payments, businesses would have trouble getting and selling goods across borders. These payments also need to be made on time to avoid delays.
2. Paying Employees and Contractors in Other Countries
Many businesses hire people from different countries. Whether they are full-time employees or freelance workers, companies must pay them. This is another reason for cross-border payments.
If a U.S.-based company hires someone in India, they will send the money across borders to pay them. Paying employees and contractors properly helps keep the business running smoothly and avoids issues with workers.
3. Investing in or Buying Foreign Businesses
Sometimes businesses want to invest in other countries or buy companies located there. A U.S. company might want to buy a business in Germany or invest in markets in Africa. These types of investments need cross-border payments.
When a business invests or buys another company, large payments are usually involved. These payments can be complicated, but they are necessary for business growth and success.
4. Paying for Services from Other Countries
Businesses also pay for services that come from other countries. This can include marketing, software, or consulting. These payments also need to be made across borders.
If a U.S. business hires a company in Canada to help with marketing or uses software from the UK, they must send money to pay for these services. A simple, reliable payment method helps businesses avoid delays.
5. Paying for Travel and Business Costs
When businesses grow, employees often need to travel for meetings or to attend events. Paying for these travel costs involves cross-border payments.
These costs can include flights, hotels, and meals. Whether the travel is to London or Tokyo, businesses need to make payments in the local currency to make sure everything goes smoothly.
6. Investing in Properties or Markets Abroad
Some businesses want to invest in property or buy shares in other countries. To do this, they need cross-border payments.
For example, a U.S. company might buy real estate in Canada or invest in companies in Asia. These payments help businesses handle investments securely and follow the laws of the country they are investing in.
7. Paying for Online Subscriptions and Digital Services
Many businesses pay for online services like software or cloud storage. If these services are based in another country, they need cross-border payments to pay for them.
These payments are often in different currencies. For example, a U.S. company might pay for software that is hosted in Germany. Managing these payments properly ensures that businesses can keep using their digital tools without interruptions.
Benefits and Drawbacks of Cross-Border Payments
Understanding the good and bad sides of cross-border payments helps businesses make better decisions. These payments are essential for working internationally but come with benefits and challenges. Let’s look at both.
Benefits of Cross-Border Payments
In simple terms, cross-border payments help businesses grow globally and process transactions faster. However, companies should be careful about the costs involved to get the best results.
- Access to Global Markets
With cross-border payments, businesses can reach customers and vendors worldwide. This gives them the chance to grow in new markets, especially if they want to sell products or services internationally.
- Increased Flexibility
These payments allow businesses to work with people and companies in other countries. They can hire workers from different parts of the world and manage a global supply chain. This flexibility helps businesses stay competitive in a connected world.
- Improved Cash Flow
When businesses accept payments from customers in other countries, they can keep money coming in. This steady cash flow is important, especially for companies that depend on overseas sales.
- Speed of Transactions
Thanks to modern digital payment platforms, cross-border payments are often faster than before. Quick payments allow businesses to keep moving forward, close deals faster, and avoid delays.
- Better Risk Management
Using different payment methods across countries helps spread the risk. This can lower the chances of losing money if one market or currency faces problems.
Drawbacks of Cross-Border Payments
While cross-border payments offer great opportunities, they also come with some challenges. Businesses need to manage things like fees, security, and rules to make sure everything runs smoothly.
- High Fees
One downside of cross-border payments is that they can come with high fees. Banks and payment platforms often charge extra for converting currencies or making international transfers. These costs can add up, especially for small businesses that do a lot of international business.
- Currency Exchange Issues
Currency exchange rates can change quickly. This means a business might receive more or less money depending on how the value of currencies shifts. This can cause unexpected costs or lower profits.
- Compliance and Legal Challenges
Each country has different rules for payments. Businesses must follow these rules, including taxes and reporting requirements. It takes time and effort to make sure everything is done right, and sometimes legal advice is needed.
- Delays in Payment Processing
Some cross-border payments take longer to process, depending on the method used. If payments are delayed, it can disrupt business plans, especially when time is important for closing deals or fulfilling orders.
- Security Risks
Cross-border payments can be vulnerable to fraud or security problems. It is important to choose secure payment methods to protect both financial information and business operations.
How to Send Cross-Border Payments?
Sending cross-border payments is a straightforward process. Here is a simple, step-by-step guide to help you get it right.
Step 1: Choose Your Payment Method
The first thing you need to do is decide how you will send the payment. There are several options, including:
- Bank Transfers: Traditional, but can be slow and expensive.
- Online Payment Platforms: Fast and often cheaper (e.g., PayPal, TransferWise).
- Digital Currencies: For tech-savvy businesses, cryptocurrencies can be used for cross-border payments.
Step 2: Know the Details of the Recipient
You will need certain details to send the payment:
- The recipient’s bank account details (if using a bank transfer).
- The recipient’s email or payment platform username (if using online payment systems).
- The currency you are sending and how much you need to convert (if applicable).
Step 3: Check for Fees
Before confirming the payment, check for any fees that may apply. Fees could include:
- Transfer fees: Charged by banks or payment platforms.
- Currency conversion fees: If you are sending money in a different currency.
- Receiving fees: Some recipients may also be charged a fee to receive the payment.
Make sure to compare the fees of different payment methods to get the best deal.
Step 4: Convert the Currency (If Needed)
If you are sending money in a different currency, most payment platforms will automatically convert it for you. However, it is important to check the exchange rates and conversion fees, as they can vary. You may want to use a currency conversion tool to understand the rates.
Step 5: Verify the Information
Double-check all the details:
- The recipient’s information (name, bank details, payment platform).
- The amount and currency you are sending.
- Any fees involved.
Ensuring everything is correct will prevent delays and errors.
Step 6: Make the Payment
Once everything is set, confirm the payment. Depending on your method, it may be processed immediately or take a few days. If using online platforms, payments are often quicker.
Step 7: Keep a Record
Always save a receipt or confirmation number after making the payment. This will help track and resolve any issues in case something goes wrong.
Make Cross-Border Financing a Breeze With Peakflo’s AP and AR Automation
Managing cross-border financing can be tough. Handling payments and collections across borders means dealing with different currencies, time zones, and regulations.
Peakflo helps you automate Accounts Payable (AP) and Accounts Receivable (AR) processes, making things faster, easier, and more accurate.
Accounts Payable (AP) Solutions
Cross-border financing brings unique challenges for AP teams, from managing multiple currencies to complying with international tax regulations. Here’s how AP automation can streamline the process:
- Multi-Currency Invoice Processing: Automatically convert and reconcile invoices in different currencies.
- Compliance with Global Tax Regulations: Ensure accurate tax calculations, including VAT and GST, across jurisdictions.
- Faster Cross-Border Payments: Automate approvals and payments to reduce delays and FX costs.
- AI-Powered Fraud Detection: Identify duplicate invoices and flag suspicious transactions in real-time.
- Seamless ERP & Banking Integrations: Sync payments and accounting entries across global financial systems.
Accounts Receivable (AR) Solutions
Cross-border financing brings unique challenges for AR teams, from currency fluctuations to payment delays and compliance hurdles. Here’s how AR automation can streamline the process:
- Multi-Currency Invoicing: Generate invoices in multiple currencies with real-time exchange rate updates.
- Automated Payment Reconciliation: Match incoming payments with invoices using AI, reducing errors and speeding up cash application.
- Seamless Cross-Border Payments: Integrate with international payment gateways to offer multiple payment options to customers and minimize transaction delays.
- Regulatory Compliance & Tax Management: Ensure adherence to international tax laws, automate e-invoicing, and streamline VAT and GST compliance.
Conclusion
Managing cross-border financing doesn’t have to be overwhelming. With Peakflo, you can streamline your AP and AR processes, cut down on errors, and save valuable time. Whether it is automating payments or speeding up collections, Peakflo takes care of the hard work for you.
Still have questions? Want to see how it works for your business? Book a demo tour now, and discover how Peakflo can make cross-border financing easier and faster than ever.
Ready to give it a try? Click here to schedule your free demo today!
