How to Help Borrowers Navigate Safer Passage into Global Markets

by: Smith and Howard

October 14, 2015

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Going global may seem like a smart growth strategy. But there are several pitfalls that need to be factored into the decision and administrative tasks that need to be managed once a company decides to take the plunge into overseas markets. Borrowers who take this decision lightly could be headed for stormy seas, taking their lenders along for a turbulent ride.

Hidden costs and other minefields

Globalization strategies are typically based on 1) selling to a new market overseas and 2) lowering production or administrative costs with foreign supply chain partners. If a borrower plans to sell to foreign businesses or consumers, ask whether management has done a market feasibility study in key target markets to gauge demand on a smaller scale. Learning local regulations, customs and tax rules is critical before selling globally on a larger scale.

Companies that move production or administrative functions, such as accounting or customer service centers, offshore should watch out for hidden costs. Examples may include:

  • Inferior materials quality,
  • Lower productivity rates and high employee turnover,
  • Shipping delays and hidden tariffs,
  • Foreign currency fluctuations,
  • Intellectual property theft,
  • Fraud and other unethical behaviors, and
  • Reduced goodwill from negative customer experiences and unfavorable publicity.

In addition, labor, materials and taxes may initially seem cheaper in a foreign country. But wages in some countries, such as China or India, are rising. And the pool of skilled workers sometimes may be limited overseas, especially for high-tech manufacturers.

Administrative obstacles

When borrowers start down the globalization path, they’re often surprised by all the red tape required. Accounting for foreign subsidiaries requires an understanding of international financial reporting standards and complex transfer tax issues that are beyond the capabilities of in-house accounting personnel at most closely held U.S. companies.

It also may be unwise to leave accounting and record-keeping to the management of foreign subsidiaries. Lax oversight and informal controls may lead to mistakes, omissions, legal issues and even fraud.

Other exporting issues to master before going global include:

Certificates of origin. Exporters declare where a product was obtained, produced, manufactured or processed on its certificate of origin. These documents are used to determine the duty assessed on goods — or whether products may be legally imported to a country at all. U.S. companies are forbidden from exporting to certain foreign countries, such as Iran. If a borrower misunderstands the rules that govern certificates of origin, it could lead to unexpected duties and interest expense.

Export licenses. Some products — such as weapons, prescription drugs and technology — may require export licenses to sell overseas. It’s up to the exporter to determine whether a product requires licensing and to research the end use of the product. In some cases, it may be unclear which federal department or agency has jurisdiction over the item a borrower is planning to export.

Borrowers also need to clearly identify the importer of record that’s responsible for duties, taxes and legal issues as products cross borders. When borrowers underestimate their responsibilities, they may unexpectedly lose money on global transactions.

Outside help

Are the incremental revenues and cost savings associated with globalization worth the expense and hassle of setting up business on foreign soil? An international preparedness assessment conducted by an independent financial advisor experienced in the target market can help borrowers chart a successful path to globalization. These assessments identify hidden costs and prepare management for the administrative tasks ahead — and give lenders much-needed peace of mind.

Have questions about helping your borrowers go global? Or, are you looking for more information on our commercial lender services, including SBA valuation? Contact Mark Abrams at 404-874-6244 or fill out our form for more information. 

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If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.