Looking for finance from abroad

The lower interest rates in some of the developed world countries in North America and Europe has prompted quite a few clients to ask me to look for finance from abroad for them. The interest rates is tempting as these are often half of what we are able to get in the local market.

Obtaining finance from abroad has certain problems connected to it and the entrepreneur needs to be aware of these before pursuing this option.

The first problem is obtaining the finance in the first place. This is quite difficult as the finance institutions in the foreign country doesn't always have legal representation in South Africa. The financial institution needs legal representation to secure a guarantee against the sum it lends to the entrepreneur. Without the security the recovery of the capital sum of the loan is effectively unsecured and a high risk loan. In finance terms, high risk means high interest and the interest would go up as the risk increases.

If you are able to breach the first problem and your business secure finance from abroad you have to guard against a second issue - that of currency fluctuations. The foreign loan will quite often be granted in a foreign currency. If the Rand looses value against the foreign currency the repayment of the loan principle will become more expensive which could wipe out the benefit obtained from the cheaper interest rate. Fortunately you are able to "hedge" the movement of the Rand to neutralise the effect of any currency fluctuations. The hedge will ensure you repay the same amount you've borrowed regardless of the movements in the Rand against the foreign currency - but these "Hedge" products cost money as it is in effect an insurance against the Rand loosing money.

Other issues that might arise from foreign loans are additional legal and advisory costs, different legal interpretations of terms in the foreign country from that in South Africa and issues around transferring money out of South Africa.

I don't encourage entrepreneurs to look for finance from foreign sources but these are some businesses that succeeded in obtaining this kind of finance and at SA Business Plans there have been business plans written with a view to secure finance from abroad.