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FINA1141.
International
Business
Finance

(FINA1141)

Lecture 8: The
financing of
internationalisation
and the value of the
firm in the global
economy
Learning objectives
❑ Describe the various financial instruments that can be applied to
employ international working capital.

❑ Explore the different structures that can be used to source equity and
debt globally.

❑ Design a strategy to source equity and debt globally.

 INTERNATIONAL WORKING CAPITAL FINANCING

International working capital financing

International working capital financing refers to the strategies and
methods businesses use to manage their short-term financial needs when
operating across international borders. It involves funding the day-to-
day operations and activities of a company in different countries,
ensuring smooth cash flow and liquidity.
 Financial Instruments Commonly Used To Manage and Optimize International Working Capital.
1. Letters of Credit (LC):
o A letter of credit is a financial guarantee from a bank that ensures a seller will
receive payment upon fulfilment of contractual obligations. Payment under an
LC is made against the presentation of specific documents (e.g., bill of lading,
invoice, certificate of origin) that comply with the LC terms.
2. Bank Guarantees:
o Like letters of credit, bank guarantees are commitments made by a bank to fulfil a
financial obligation if the client fails to meet it.
3. Trade Credit:
o Trade credit involves suppliers extending credit terms to buyers, allowing them to
pay for goods or services at a later date (e.g., 30, 60, 90 days).
4. Export Credit Insurance:
o Export credit insurance protects exporters against non-payment by foreign buyers due to
commercial or political risks.
o It facilitates international sales by mitigating the risk of non-payment, thereby supporting
liquidity and working capital management.
5. Currency Hedging Instruments:
o Forward contracts, options are used to hedge against currency fluctuations that can
impact the value of international receivables and payables.
o They help stabilize cash flows and protect profitability from adverse exchange rate
movements.
 Payment Methods for International Trade
Payment methods for international trade refer to the various ways in which parties involved in cross-
border transactions settle their financial obligations. These methods are crucial in determining when and
how payment is made, affecting cash flow, risk exposure, and overall transaction efficiency.
Overview of the Common Payment Methods Used In International Trade:
1. Cash in Advance:
o In this method, the buyer pays the seller before the goods are shipped or the services are provided.
o It offers the seller the highest level of security as they receive payment upfront, but it may deter
potential buyers due to the lack of credit.
2. Letters of Credit (LC):
o A letter of credit is a financial instrument issued by a bank on behalf of the buyer (importer),
guaranteeing payment to the seller (exporter) upon presentation of compliant documents.
o It provides security to both parties: the seller is assured of payment if they fulfil the terms of the
letter of credit, while the buyer ensures that payment is made only when the agreed conditions are
met (such as shipment of goods).
3. Open Account:
o In an open account arrangement, the seller ships goods and invoices the buyer with payment due at a later
date (e.g., 30, 60 days).
o It is convenient for both parties but carries higher risk for the seller as they rely on the buyer's
creditworthiness and integrity for payment.
4. Consignment:
o Under consignment, the seller (consignor) ships goods to the buyer (consignee) but retains
ownership until the goods are sold by the consignee.
o Payment is made by the consignee only upon sale of the goods, reducing financial risk for the
buyer but requiring trust between parties.
 sourcing equity and debt globally.
Global sourcing of equity and debt involves various structures tailored to meet the financial needs of
businesses operating internationally. These structures allow companies to access capital from different
markets, manage risks, and optimize financing costs. Here are different structures commonly used to
source equity and debt globally:
Equity Structures:
1. Initial Public Offering (IPO):
o An IPO involves offering shares of a private company to the public for the first time, thereby
raising equity capital.
o Companies list their shares on a stock exchange, allowing them to access a large pool of global
investors.
2. Secondary Public Offering (SPO):
o Companies already listed on a stock exchange may issue additional shares to raise capital for
expansion, debt repayment, or other corporate purposes.
o SPOs provide liquidity to existing shareholders and attract new investors.
3. Private Equity (PE) and Venture Capital (VC):
o PE firms and VCs invest directly in private companies in exchange for equity ownership.
o They provide capital for growth, expansion, or restructuring and often bring strategic guidance
and industry expertise.
4. Global Depository Receipts (GDRs) / American Depository Receipts (ADRs):
o GDRs and ADRs are certificates issued by banks representing shares of a foreign company traded
on international stock exchanges (outside their home country).
o They allow companies to raise capital in international markets without listing directly on foreign
exchanges.
5. Strategic Partnerships and Joint Ventures:
o Companies form alliances with foreign partners, combining resources, expertise, and market
access.
o Equity participation in joint ventures allows sharing of risks and rewards in international markets.
Debt Structures:
1. Bonds:
o Companies issue bonds to raise debt capital from institutional and retail investors.
o Bonds can be issued in domestic or international markets (Eurobonds), denominated in different currencies to
match funding needs and manage currency risk.
2. Syndicated Loans:
o Large loans provided by a group of lenders (syndicate) to a borrower, often with participation from banks
worldwide.
o Syndicated loans facilitate access to large amounts of capital, diversify risk among lenders, and offer flexible
terms.
3. Export Credit Agencies (ECAs):
o Government-backed agencies provide financing support (loans, guarantees, insurance) to facilitate
international trade and investments.
o ECAs enhance creditworthiness, reduce risks for lenders and borrowers, and support exports from their
respective countries.
4. Multilateral Development Banks (MDBs):
o MDBs such as the World Bank, Asian Development Bank, and European Bank for
Reconstruction and Development provide loans and guarantees for development projects
globally.
o They offer long-term financing, technical assistance, and risk mitigation to promote economic
growth and infrastructure development.
5. Convertible Bonds and Debt Equity Swaps:
o Convertible bonds allow bondholders to convert their debt into equity at predetermined terms,
providing flexibility to investors.
o Debt equity swaps involve converting debt obligations into equity ownership, restructuring
balance sheets and enhancing financial stability.
 Designing a strategy to source equity and debt globally

Sourcing equity and debt globally requires a strategic approach tailored to the specific needs and
circumstances of a business or project. Here’s a brief outline of a strategy to effectively source
both equity and debt internationally:
1. Market Research and Analysis: Conduct thorough research to identify potential markets and
investors/lenders that align with your financial requirements and risk profile. Understand local
regulations, market conditions, and investor preferences.
2. Build Relationships: Establish connections with local financial institutions, investment banks,
and potential investors/lenders through networking, conferences, and industry events. Cultivate
relationships based on mutual trust and understanding.
3. Legal and Regulatory Compliance: Ensure compliance with local laws, regulations, and tax
implications in both your home country and the target market. Engage legal and financial
advisors who specialize in international transactions to navigate complexities.
4. Customize Financing Structure: Tailor your financing structure to meet the preferences of global
investors/lenders. This may involve choosing between equity, debt, or hybrid instruments, and
structuring terms such as interest rates, repayment schedules, and exit options.
5. Diversify Funding Sources: Spread risk by diversifying funding sources across different markets
and types of investors/lenders . This reduces dependency on any single source and enhances resilience
against market fluctuations.
6. Due Diligence and Transparency: Conduct rigorous due diligence on potential investors/lenders to
assess their financial stability, reputation, and alignment with your business goals. Maintain
transparency throughout the process to build credibility.
7. Negotiation and Structuring: Negotiate terms that balance your financial needs with the
expectations of investors/lenders. Consider factors such as currency risk management, hedging
strategies, and potential future funding requirements.
8. Monitor Market Trends: Stay informed about global market trends, economic indicators, and
geopolitical developments that may impact financing conditions. Adapt your strategy accordingly to
capitalize on opportunities and mitigate risks.
9. Risk Management: Implement robust risk management strategies to safeguard against currency
fluctuations, interest rate changes, geopolitical instability, and other potential risks associated with
global financing.
10. Continuous Evaluation: Continuously evaluate the performance of your financing strategy and
adjust as necessary based on changing market conditions, business objectives, and investor/lender
preferences.
By following these steps, businesses can effectively navigate the complexities of sourcing equity and
debt globally while maximizing opportunities for growth and financial stability.
Next week readings on SME Finance:

McLaney (2014), Chapter 16