Once you have decided to grow your business through exports, the next necessary step is to assess how you can finance it. You should review your business’ financial capacity, explore all financing options, and subsequently determine the quantum of funds you will require for expanding your business by exporting.
Your financial capacity depends on the financial position of your business. In other words, the financial health of your business will affect your sources and access to funds. For example, if your business has insufficient equity capital or has already incurred a substantial amount of loan debts, your application for additional bank loans are unlikely to go through.
You may wish to approach your bank for an assessment of your business’ current financial strength and eligibility for loans or credit facilities.
Here are some common financing options available:
If your business is financially strong, this may be the best option for you as there will be no costs of loan interests and your cash flow will not be reduced by repayment commitments.
Typically, businesses rely on this mode of funding for all types of business expansion. Identifying the right bank and thoroughly planning the terms and conditions of your loan or credit facilities is crucial to maximising your returns on investment against your debt requirements.
In certain cases, friends, relatives and family can be supportive and help you finance your expansion at no cost for the loan. In some other cases, they may ask for share in the business. This option is most friendly and flexible, but note that you may put personal relationships at risks if your business expansion does not proceed according to plan or suffer losses. It is also wise to document the terms of such loans even if your personal contacts do not insist upon it.
Business angel individuals or groups are quite common in Singapore, more so than other countries in Asia. These investors look for good business models and ideas that they believe in and are willing to invest in the initial seed funding, often with little interest in taking an active management role in the business.
While the rates of return of investments required by angel investors are higher than the interest rates of bank loans or credit facilities, there are two advantages: one, there is no repayment schedule affecting cashflow, and two, some business angels may be interested to proceed to a full active equity stake when the business has matured to an acceptable stage, and this provides the business a potential source of future funding. You will need to thoroughly plan and carefully consider the exit or reinvestment mechanism of your angel investors, and in this respect you will need to hire a lawyer experienced in putting together an angel investment deal.
Commonly termed as PE and VC investors, such investors are either high net worth individuals or well-organised private sector firms managing a pool of funds from other investors. In the latter category, you will likely be dealing with professional investment analysts or fund managers. Do note that PE and VC investors are mostly active investors who take active management roles and, in many cases, eventual management buyout through public listing or acquisition. They will only be suitable if selling out to third parties is your eventual goal or, if you intend to go for public listing, their expertise and experience in management and operations will be invaluable. You will need to thoroughly plan and carefully consider the exit or reinvestment mechanism of your PE or VC investors, and in this respect you will need to hire a lawyer experienced in putting together a PE or VC investment deal.
Having a written business plan and export strategy plan is important to keep you on track towards achieving your vision when growing your business through exports.
Having these plans is important if you intend to seek bank loans or credit facilities.
Having them is a pre-requisite if you intend to seek angel, PE or VC investors. You need to put together a sound business plan to enable your bank or prospective investors to understand your business, and a sound export strategy plan to enable them to understand why you require funding for expansion. Your past financials should be included in your business plan. Your export strategy plan should include financial modeling, projecting potential profits in best, worst and most likely scenarios.
A financial forecast is essential in determining the quantum of funds you need. Upon drawing up your financial plan, you can now assess if the amount of funding required can be met by your company’s financial capacity or eligibility for borrowing. You need to understand the costs of expansion to your business as opposed to the potential revenue it will reap. Basic components that you may have to include in your financial plan are:
The above is a non-comprehensive list of components to be inserted into your financial planning. Other considerations such as foreign exchange volatility and taxes (i.e. transfer pricing, market’s corporate tax, personal tax compliance) can also affect your cash flows drastically.
Regardless of your funding options, it is always advisable to approach an export consultant when drawing up your export operation financing plan.