Global Expansion Funding Options

Funding Options for Global Expansion: A Guide for Entrepreneurs

Kurt GraverBusiness Development

This blog post delves into the essential aspects of financing the global journey. It provides UK entrepreneurs valuable insights and strategies for funding their international growth, managing financial risks, and ensuring long-term sustainability. By examining various funding options, risk management techniques, and financial planning best practices, this post aims to equip UK entrepreneurs with the knowledge and tools necessary to navigate the complex financial landscape of international business.

Funding Options for Global Expansion


One of the first steps in financing the global journey is identifying and securing appropriate funding sources. UK entrepreneurs have various options, each with advantages and disadvantages.

Equity Financing


Equity financing involves raising capital by selling a portion of the company’s ownership to investors. This can include:

  • Angel Investors: High net-worth individuals who provide capital in exchange for equity, often at the early stages of a company’s growth. According to the UK Business Angels Association, angel investors contributed £1.5 billion to the UK economy in 2019 [2].
  • Venture Capital (VC): VC firms invest in high-growth potential companies in exchange for equity. In 2020, UK tech companies attracted a record £11.2 billion in VC funding despite the challenges posed by the pandemic [3].
  • Crowdfunding: Platforms like Crowdcube and Seedrs allow entrepreneurs to raise capital from many individual investors in exchange for equity. In 2020, UK crowdfunding platforms facilitated over £200 million in investments [4].

Equity financing has the main advantage of not requiring regular repayments, allowing entrepreneurs to focus on growth. However, it also involves giving up a portion of ownership and control in the company.

Debt Financing


Debt financing involves borrowing money that must be repaid with interest over a specific period. Options include:

  • Bank Loans: Traditional loans from high street banks, such as HSBC, Barclays, and Lloyds, can provide significant funding for global expansion. However, securing these loans often requires collateral and a strong credit history.
  • Government-backed Loans: The UK government offers various loan schemes to support international trade, such as the Export Working Capital Scheme and the General Export Facility, provided through UK Export Finance (UKEF) [5].
  • Peer-to-Peer (P2P) Lending: Lending platforms like Funding Circle connect entrepreneurs with individual lenders, often offering more flexible terms than traditional banks [6].

The main advantage of debt financing is that it allows entrepreneurs to retain full ownership and control of their company. However, regular repayments can strain cash flow, and high interest rates can be a significant burden.

Grants and Subsidies


UK entrepreneurs can also explore grants and subsidies offered by the government and other organizations to support international expansion. Examples include:

  • The Department for International Trade (DIT) Internationalisation Fund: Provides grants between £1,000 and £9,000 to help UK SMEs develop their overseas trade [7].
  • The Innovate UK Global Challenges Research Fund: Provides funding for UK businesses to develop innovative solutions to global challenges, such as climate change and healthcare [9].

Grants and subsidies can provide non-repayable funding, making them attractive options for entrepreneurs. However, they often have strict eligibility criteria and reporting requirements.

Strategic Partnerships and Joint Ventures


Strategic partnerships or joint ventures with established international companies can provide access to funding, resources, and market knowledge. These collaborations can take various forms, such as:

  • Licensing Agreements: Granting a foreign company the rights to manufacture and sell a product or service in exchange for royalties or fees.
  • Distribution Partnerships: Partnering with a foreign company to distribute and market products or services in their local market.
  • Joint Ventures: Creating a new entity with a foreign partner, sharing ownership, control, and profits.

Strategic partnerships can provide a cost-effective way to enter new markets and access funding. However, they also involve sharing control and profits with a partner, and cultural differences can pose challenges.

Case Study: Revolut’s Global Expansion Funding


Revolut, a UK-based fintech company, has raised significant funding to fuel its global expansion. Founded in 2015, Revolut offers digital banking services, including multicurrency accounts, currency exchange, and international money transfers [10].

To date, Revolut has raised over $900 million across multiple funding rounds, including:

  • Series A: $8.4 million from Balderton Capital and Ribbit Capital in 2016 [11].
  • Series B: $66 million from Index Ventures and Balderton Capital in 2017 [12].
  • Series C: $250 million from DST Global and others in 2018 [13].
  • Series D: $500 million from TCV and others in 2020, valuing the company at $5.5 billion [14].

Revolut has used this funding to expand its services across Europe, North America, and Asia, acquiring over 15 million customers globally. The company’s success demonstrates the importance of securing adequate funding to fuel international growth and the potential of fintech startups to attract significant investments.

Managing Financial Risks in Global Markets


Expanding globally exposes UK entrepreneurs to various financial risks that can impact their bottom line. Effective risk management strategies are crucial to mitigate these risks and ensure long-term sustainability.

Currency Risk


Currency risk arises from fluctuations in exchange rates, which can affect the value of a company’s international transactions and investments. To manage currency risk, UK entrepreneurs can:

  • Use financial instruments, such as forward contracts and options, to lock in favourable exchange rates and protect against currency fluctuations. According to a Bank of England survey, 70% of UK SMEs use some form of currency hedging [15].
  • Match foreign currency income with expenses to create a natural hedge. For example, a UK company exporting to the US could use its US dollar revenue to pay for US-based expenses.
  • Conduct business in multiple currencies and markets to spread currency risk. This can help balance the impact of currency fluctuations on overall financial performance.

Political and Economic Risk


Political and economic instability in international markets can pose significant risks to UK businesses. To manage these risks, entrepreneurs can:

  • Obtain insurance coverage against risks such as expropriation, currency inconvertibility, and political violence. The UK government’s export credit agency, UK Export Finance (UKEF), offers political risk insurance for UK exporters [16].
  • Conduct thorough due diligence on potential partners, customers, and markets to assess political and economic risks. This can include analyzing country risk reports, monitoring political developments, and engaging with local experts.
  • Develop contingency plans for various political and economic scenarios, such as changes in government regulations, economic downturns, or trade disputes.

Credit Risk


Credit risk is the potential for financial loss from a customer or counterparty failing to meet payment obligations. To manage credit risk, UK entrepreneurs can:

  • Conduct credit checks on potential customers and partners to assess their creditworthiness and financial stability. Services like Experian and Dun & Bradstreet offer international credit reports.
  • Negotiate favourable payment terms, such as requiring upfront payments, letters of credit, or bank guarantees, to reduce exposure to credit risk.
  • Obtain credit insurance to protect against customer non-payment. UKEF offers an Export Insurance Policy that covers up to 95% of the value of an export contract [17].

Case Study: Aston Martin’s Currency Risk Management


Aston Martin, the iconic British luxury car manufacturer, faces significant currency risks due to its global operations and export-oriented business model. In 2019, approximately 60% of the company’s revenue was generated outside the UK, primarily in US dollars and euros [18].

Aston Martin employs a comprehensive hedging strategy to manage its currency risk, combining forward contracts and options to lock in favourable exchange rates and protect against currency fluctuations. The company also actively monitors its currency exposures and adjusts its hedging positions based on market conditions and forecasts [19].

In addition to hedging, Aston Martin has diversified its manufacturing footprint to create natural hedges. The company has production facilities in the UK and Wales, and it has recently opened a new factory in St Athan, Wales, to produce its first SUV, the DBX, which will be primarily exported to the US and China [20].

Aston Martin’s proactive approach to currency risk management has helped the company navigate the challenges posed by Brexit and the COVID-19 pandemic, demonstrating the importance of robust risk management strategies for UK businesses operating in global markets.

Financial Planning for Long-Term Sustainability


Ensuring long-term financial sustainability is crucial for UK entrepreneurs expanding globally. Effective financial planning and forecasting can help businesses make informed decisions, allocate resources effectively, and adapt to changing market conditions.

Budgeting and Forecasting


Developing accurate budgets and financial forecasts is essential for managing global operations. Key considerations include:

  • Project international sales based on market research, historical data, and input from local teams. Consider factors such as market size, competition, and pricing strategies.
  • Estimate the costs associated with global expansion, including market entry costs, operational expenses, and personnel costs. Account for differences in local costs of living and doing business.
  • Project cash inflows and outflows to ensure adequate liquidity and identify potential funding gaps. Consider the impact of currency fluctuations and payment terms on cash flow.

Financial Performance Monitoring


Regularly monitoring financial performance is crucial for making timely decisions and adjusting strategies. Key metrics to track include:

  • Monitor international sales growth and compare against targets and benchmarks. Analyze growth drivers and identify areas for improvement.
  • Track profitability metrics for each international market, such as gross margin, operating margin, and net margin. Identify factors impacting profitability, such as pricing, costs, and economies of scale.
  • Measure the ROI of international expansion efforts, considering market entry costs, sales growth, and profitability. Use ROI analysis to prioritize markets and allocate resources.

Tax Planning


Navigating international tax complexities is critical to financial planning for global expansion. UK entrepreneurs should:

  • Research and comply with local tax laws and regulations in each international market, including corporate income tax, value-added tax (VAT), and withholding taxes.
  • Consider the most tax-efficient corporate structures for international operations, such as establishing foreign subsidiaries or branches. Consult with international tax experts to identify opportunities for tax optimization.
  • Ensure intra-company transactions, such as transferring goods, services, or intellectual property between international subsidiaries, comply with transfer pricing regulations to avoid double taxation and penalties.

Scenario Planning and Stress Testing


In the face of global uncertainties, scenario planning and stress testing can help UK entrepreneurs prepare for potential challenges and build resilience. This involves:

  • Create best-case, base-case, and worst-case scenarios based on different assumptions about market conditions, exchange rates, and political risks.
  • Test the impact of each scenario on financial performance, cash flow, and liquidity. Identify potential vulnerabilities and develop contingency plans.
  • Analyze the sensitivity of financial outcomes to changes in key variables, such as sales volume, prices, and costs. Use this analysis to identify critical risk factors and develop risk mitigation strategies.

Case Study: Burberry’s Global Financial Planning


Burberry, the iconic British luxury fashion brand, has a strong presence in international markets, with over 80% of its revenue generated outside the UK [21]. Burberry has implemented robust financial planning and forecasting processes to ensure long-term financial sustainability.

Burberry’s financial planning approach includes:

  • Burberry develops granular sales forecasts for each international market, considering historical performance, market trends, and new product launches. The company uses advanced analytics and machine learning to improve forecast accuracy [22].
  • Burberry monitors its cost structure and implements cost optimization initiatives, such as supply chain efficiencies and resource allocation. The company also leverages its global scale to negotiate favourable terms with suppliers [23].
  • Burberry’s global tax strategy focuses on compliance, transparency, and risk management. The company works closely with international tax advisors to ensure its corporate structure and transfer pricing policies are tax-efficient and compliant [24].
  • Burberry regularly conducts scenario planning to assess the potential impact of various risks, such as changes in consumer demand, currency fluctuations, and geopolitical events. This helps the company develop contingency plans and adapt its strategies accordingly [25].

Burberry’s comprehensive approach to financial planning has enabled the company to navigate the challenges posed by Brexit, the COVID-19 pandemic, and shifts in consumer behavior. This demonstrates the importance of robust financial planning and forecasting for UK businesses operating in global markets.

Conclusion


Financing the global journey is a complex and multifaceted challenge for UK entrepreneurs. Securing the right funding mix, managing financial risks, and ensuring long-term sustainability are critical success factors for international expansion.

UK entrepreneurs have various funding options, including equity financing, debt financing, grants and subsidies, and strategic partnerships. Each option has advantages and disadvantages, and the choice depends on factors such as the company’s growth stage, risk profile, and ownership structure. As the Revolut case study demonstrates, successful global expansion often requires significant funding from multiple sources.

Managing financial risks is another key aspect of financing the global journey. UK entrepreneurs must navigate currency, political, economic, and credit risks when operating in international markets. Effective risk management strategies, such as hedging, due diligence, and insurance, can help mitigate these risks and protect the company’s financial performance. Aston Martin’s proactive approach to currency risk management is a best practice example for UK exporters.

Finally, ensuring long-term financial sustainability requires robust financial planning and forecasting. UK entrepreneurs must develop accurate budgets, monitor financial performance, optimize tax structures, and conduct scenario planning and stress testing to build resilience in the face of global uncertainties. Burberry’s comprehensive approach to financial planning demonstrates the importance of these practices for UK businesses operating in international markets.

In conclusion, financing the global journey is a critical component of international expansion for UK entrepreneurs. By developing a comprehensive financial strategy that encompasses funding, risk management, and long-term sustainability, UK businesses can navigate the complexities of global markets and achieve their international growth objectives. With the right financial foundation in place, UK entrepreneurs can confidently embark on their global journey and seize the opportunities presented by an interconnected world.

References

  1. British Business Bank. (2020). UK SME Exporting Trends: Finance and Trade 2020. https://www.british-business-bank.co.uk/research/uk-sme-exporting-trends-finance-and-trade-2020/
  2. UK Business Angels Association. (2021). A Nation of Angels: The Unsung Heroes of the UK Economy. https://www.ukbaa.org.uk/news/a-nation-of-angels-the-unsung-heroes-of-the-uk-economy/
  3. Tech Nation. (2021). UK Tech for a Changing World: Tech Nation Report 2021. https://technation.io/report2021/
  4. Cambridge Centre for Alternative Finance. (2021). The Global Alternative Finance Market Benchmarking Report. https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/the-global-alternative-finance-market-benchmarking-report/
  5. UK Export Finance. (2021). Finance and Insurance Services for Exporters. https://www.gov.uk/government/collections/finance-and-insurance-services-for-exporters
  6. Funding Circle. (2021). Small Business Loans: Funding Circle UK. https://www.fundingcircle.com/uk/small-business-loans/
  7. Department for International Trade. (2021). Internationalisation Fund: Guidance for SMEs. https://www.gov.uk/government/publications/internationalisation-fund-for-smes-guidance-for-smes
  8. European Commission. (2021). European Regional Development Fund. https://ec.europa.eu/regional_policy/en/funding/erdf/
  9. Innovate UK. (2021). Global Challenges Research Fund. https://www.ukri.org/our-work/collaborating-internationally/global-challenges-research-fund/
  10. Revolut. (2021). About Revolut. https://www.revolut.com/en-GB/about-revolut
  11. Crunchbase. (2021). Revolut Series A. https://www.crunchbase.com/funding_round/revolut-series-a–7e40fb56
  12. Crunchbase. (2021). Revolut Series B. https://www.crunchbase.com/funding_round/revolut-series-b–e4f