Sources of External Financing for Multinational Enterprises
Corporations that do business in multiple countries can find themselves cash-strapped in today’s volatile business climate. If a multinational business needs an influx of operating cash, it can raise funds in many ways from share issues to private loans. The best approach may be a combination of strategies. Knowing the options are key to making the best choice.
Common sources of financing for global business entities include issuing equity, private financing agreements and even government subsidies.
A cash-strapped global organization can partner with investment banks to solve cash flow issues both now and in the future by issuing equity in exchange for cash in markets such as the stock exchanges in New York, Tokyo, London and Hong Kong. The company works with investment bankers first to analyze conditions in the global equity markets. Armed with that analysis, the company can schedule its stock offering to maximize the resulting investment. Experienced investment bankers can also help the company figure out how to prevent cash flow problems in the future.
Multinational companies can take advantage of options beyond domestic financing. Because these businesses can raise money overseas, they enjoy more flexible funding options than companies based solely in one country.
Corporations aren’t just limited to offering shares of ownership in exchange for cash. They can also raise needed funds by selling debt in the form of bonds. Selling debt products is a complicated process that’s governed by strict regulations in most countries. Companies must clear several regulatory hurdles before even being granted access to the credit market. That’s because holders of debt (creditors) are treated differently than owners of stock (shareholders) when it comes to repayment and priority if the company becomes insolvent.
In addition to bonds, a global business entity can raise much-needed operating funds for its operations by selling commercial paper. This is another kind of debt instrument that becomes due within 270 days.
Offering equity or debt products on an open market isn’t the only way to raise funds from private sources. Often, private lenders can be more flexible and responsive in a crisis, leading to faster funding than a well-regulated stock market can offer. When funds are needed, an international company can reach out to private lenders such as banks, insurance companies, hedge funds and private equity funds. With a strong international presence, the company may negotiate a loan or a line of credit directly with a domestic bank. Then local branches of the lender can work with the company’s foreign management.
Last but not least, an international company can look beyond private business enterprises and individuals to a form of corporate public assistance. Many government agencies offer subsidies to companies meeting specific requirements. Government subsidies are generally designed to help attract new business to a city or area, which helps create jobs and improves the local economy. For instance, export businesses and companies in the oil and gas sector can qualify for government subsidies or grants. If a corporation can meet the regulatory requirements and is in an eligible line of business, a government subsidy can help provide needed funds for operational expenses.