How can a small business raise funds from overseas?

A.Introduction – Problem identification

The most challenging task of a small-to-medium (SME) business is financial management. Money for start-up cost, money for fixed assets investment, money for working capital, money for expansion, money for contingencies…are the main sources of stress and strain of daily business operation. A study done by SBA in 1996 identified “lack of money” was the cause claimed by 83% of entrepreneurs for their business failures. Henry Ford, the business legend, had only one Golden Rule on business to pass on, “ Never run out of cash”.

For owners of SMEs in emerging markets, the money factor is more critical. Governments in these countries do not have as many assistance programs for SME like those in the US, Japan or Europe. Their choices of local funding are usually limited to relatives, friends, loan sharks or black-market banks. The regular financial institutions require too many collaterals and mortgages due to the non-availability of credit reporting system. Meanwhile, international funding is strange and complex to these SMEs, even if the legal and economical environments are favorable.

The objective of this paper is to de-mystify the process and players involved in international funding so local SMEs could tap into this resource more readily.

B.Local funding

If possible, SME should always look into local funding sources first. They are easy to access, they speak the same languages, both understand the legal system, and more importantly, approval could be fast. For bigger or state-owned enterprises, the best option is to evaluate and find a suitable investment banker who is experienced in raising money in the same industry at about the same deal size. For SMEs, solution could be found with:

1. Regular financial institutions: banks, local funds, finance and leasing companies, insurance companies. Each of these institutions has their own funding criteria and SMEs should contact them directly to understand first their requirements. Sometimes, SMEs must use a bank for working capital need, another leasing company for fixed assets investment and a local fund for risk capital.
2. Private money lenders: family, friends, black-market banks, loan sharks. If the regular channel is not available, many SMEs are forced to use a back-door approach. These funding sources are risky, expensive, emotional (when dealing with friends and family members), and in general, not good for your health.
3. Listing (IPO) in local markets: waiting time, listing qualifications, liquidity or manipulation are the common problems of many emerging stock markets. In addition, the exit strategy of owners might be hampered by government regulations and tax authorities.

C.International Funding

Overseas funding are more suitable to larger-sized operations due to the cross-country legal and auditing cost. Realistically, if the market valuation of a SME is below US$10 million, with low growth prospect, its chance of obtaining international funding is very limited. The positive aspects of overseas funding include the diversity of funding sources, the long-term perspective of investors and the valuable assistance in management practices. International financiers could also help local firms in finding strategic partners, technology transfer solution or export market. The sources of overseas funding include:

1. Financial institutions:

1. Operating principle: International financial institutions are governed by strict governmental regulations and internal guidelines. Their risk tolerance is extremely low; therefore, their funding practice emphasizes deal size and management experience. Small start-ups and low profit SMEs are certainly not their desirable customers.
2. Types: banks, finance and leasing companies, insurance companies. Among these, leasing companies are suitable for most fixed assets purchases such as machineries, car, trucks and equipment; while banks are keen on import-export lending. Account receivables financing are available at most places if your customers are credit-rated. Insurance companies prefer real estate or long-term lease on aircrafts, but legal requirements are strict.

2. Venture capital/ Angel investors

1. Operating principle: Like their name suggests, these investors are taking major risks in backing start-ups with potential of “home run” (big success). They usually lost money in 8 out of 10 deals, so they require a return of 100 times on the remaining 2 winners to cover the loss. Their favorite playground are the cutting-edge technology companies (hi-tech or bio-tech) with enormous market potential. They usually invest in equities, with options; and they demand a large slice of your company. However, they could also help with management practices and industry networking.
   
2. How to locate: Most countries have their own VC (venture capital) associations with complete contact address. Make sure you search for the right VC which specializes in your industry and your deal size.

3. Hedge funds

1. Operating principle: Hedge funds are diversified in size, investment objective and operational strategy. Most of them prefer short-term investment horizon, as their shareholders do not like to be locked in long-term contracts. Any deal size or type is possible, but you must have a good understanding of their investment strategy before approaching.
   
2. How to locate: Directories of funds are available for sale by many international data provider. Check your search engines for contact address.?

4. Public listing

1. Overview: Overseas stock exchanges, especially those in U.S., Europe, Japan or Hong Kong, offer better liquidity (bigger trading volume), less volatility, easier for owners to exit, higher prestige and stronger networking potential thanks to international exposure. However, the IPO and maintenance cost of listing is much more expensive, corporate governance requirements are stricter and investor communication might be a problem for local SMEs.
2. Venues: The US might be the most desirable but NYSE or Nasdaq have listing requirements beyond the reach of most SMEs. The AMEX (American Stock Exchange), the OTC board and the Pink Sheet listing could offer excellent alternatives to local listing. In Europe, while LSE or FSE might have high listing standards, the EuroNext, or AIM could be suitable to many SMEs. Tokyo has Jaspaq, Hong Kong has GEM and Singapore has … which are secondary boards catered to SMEs. Many other regional exchanges in Maylaysia, South Korea or Dubai could also be considered.

• Little-known facts: Local SMEs plan to seek overseas listing should look into the OTC board in the US or a RTO (reverse take-over or reverse merger). These two venues are quick, lower cost and deliver to SME owners the same benefit as any other listing choice. Since this subject is of most interest to SMEs, we present the OTC market in the US as well as the RTO method in a separate white paper.