Gaining access to working capital is a struggle for many businesses and one of the biggest barriers to their growth. This is especially true for new, untested ventures that are starting to compete in a crowded market.
It also ranks highly as one of the reasons why new businesses fail. One study, for instance, found that about 29% of startups failed after running out of cash. Cash flow and liquid capital reserves are critical to the continued operation of a small business, so saving money and reducing business costs is essential for your small business to thrive in the early stages.
While many factors contribute to a business's inability to access funds, none ranks higher than the stringent lending and investment requirements of most financial institutions. Along with the increasing number of businesses starting every day, this makes it difficult for many businesses to get investment from regular sources. Therefore, for businesses that want to grow despite the challenges, casting a wider net into the global arena often offers a better chance of success than staying local.
There are always venture capitalists, private equity firms and other investors willing to put their money on businesses outside their own countries. If you do choose to go global for funding, here are a few things to keep in mind.
Editor's note: Need a loan for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
How to secure funding from international investors
1. Prioritize documentation and compliance.
Regulations and compliance issues vary by region. Foreign investors always want to make sure your business complies with regulations in your region so their investment doesn't go to naught when you're nabbed for breaking the rules. To that end, ensure your business complies with the relevant employment and benefits regulations, foreign direct investment (FDI) and banking regulations, and any rules within your region.
Proper documentation also helps your business stay deal-ready. A detailed description of your competition, pricing and financial model, organizational structure, company leadership, and product, along with any related documentation, will ensure your business is ready to roll as soon as you've made your pitch.
2. Beware of fees and charges.
One popular option for businesses looking for overseas funding is to use a finder – a company or individual that helps businesses locate potential partners or investors. While these finders can make it easier to secure funding, they often charge exorbitant rates as "finder's fees."
In the U.S., for instance, it is common for finders to use the Lehman Formula to calculate how much you should pay them once you secure funding. Accordingly, paying anything above 10% for any amount of funding would be excessive, so it always pays to be vigilant.
Because you'll be dealing with multiple currencies from potential foreign investors, it's also important to know your way around the forex market. Banks and many other financial institutions often add up to 3% markup above the market rate for most currency pairs, which could ultimately mean your business receives substantially less money.
You should also keep note of recurrent charges, such as taxes and annual fees that your investors will have to pay before and after making an investment agreement with your company.
3. Don't shy away from emerging tech.
Technology is changing the way investors interact with potential businesses. Initial coin offerings (ICOs), for instance, have helped startups raise billions of dollars in funding in recent years, even surpassing investment totals from traditional investment vehicles like VCs and private equity funds.
New investment vehicles like ICOs allow investors to put their money on businesses outside their home countries, sometimes without the intermediaries that often make it more expensive to invest. They also allow businesses to interact with potential investors outside traditional banking systems. According to data published by Paydayr, for instance, about 13 million Americans have little to no access to the traditional banking system. These people might still be interested in an investment opportunity, provided it's the right platform.
So, do your homework on every funding opportunity from emerging technologies. Check out blockchain peer-to-peer lending platforms, AI-powered investment vehicles, and other tech-based options to ensure your business doesn't miss out on any opportunities of going global.
4. Explore networking opportunities.
Foreign investors have to contend with unfamiliar tax regimes, legislation and markets that make global investments a risky venture. It always helps to have an intermediary or common platform that your business and potential foreign investors will share to mitigate these risks. International communities and events offer the perfect platform for reducing risk and building trust.
Be on the lookout for events such as Startup Grind and TNW conferences that connect global investors to local SMBs and startups. Check out international accelerators like 500 Startups, and try to join international trade associations across continents.
Pros and cons of foreign funding
Pros
- It expands your funding options. Domestic funding can be notoriously difficult to come by, especially if you're a brand-new startup. If you're not having much luck with traditional banks and other lenders, looking beyond your home country's borders might be the best choice. Foreign investors are always looking for businesses to invest in, so startups should have a plethora of opportunities to pursue.
- It opens up networking opportunities. Success often boils down to who you know, and making inroads with foreign business leaders can help you expand your professional network. Once you've established a strong relationship with one or two investors in a certain country, it could open the door for other collaboration or partnership opportunities in that region.
- It brings diverse perspectives to your business. At a time when diversity and inclusion are more in the spotlight than ever, the perspectives of investors from other countries could be a boon to your business and its internal culture. These individuals will bring their unique backgrounds and viewpoints to the table, perhaps helping you and your team envision possibilities that you wouldn't have thought of on your own.
Cons
- It has higher risks. While foreign funding might have high returns, it can be a risky choice and is best used as an alternative to longer-term funding. For example, currency and economic changes can both impact foreign aid investment.
- You'll have to navigate cultural differences. Anyone who's conducted business overseas knows that cultural differences can have a big impact. Business customs and standards vary by country, and if you're not familiar with those nuances in a given location, you might strike out when you pitch a foreign investor.
- There are practical communication barriers. From time zone differences to translation errors, it can be tricky to communicate with overseas business partners. Clear and transparent communication is essential to the success of any investor-investee relationship, so before you seek international funding, you need to have a good handle on the language (if different from your native language) and how you will schedule and conduct check-ins with your investors.
Sean Peek contributed to the writing and research in this article.