Cross-Border Financing

Reviewed by Vineeth | Updated on Aug 27, 2020

Introduction

Cross-border financing is defined as the financing deals that happen beyond the country’s borders. Cross border financing includes financial arrangements, such as letters of credit, beyond the borders loan, repatriable income, and bankers acceptances.

What is Cross-Border Financing?

Cross-border financing inside companies may become extremely complicated, predominantly due to every inter-company credit that goes beyond the international borders will be subject to taxation and may face issues. This generally happens when a third party, such as banks, lend money.

Large multinational companies usually have a team of tax experts, accountants, lawyers, and other professionals that are capable of evaluating the best tax-efficient way to deal with those operations that involve overseas financing.

Political and currency risks are prevalent in cross-border financing. If the structure of loan terms is not made by considering the possible risks that arise due to various conditions, then obtaining a favourable rate will become a difficult task. Some factors, such as upcoming elections and changing political stance has the potential to cause the deal to be incomplete or void.

Despite financial institutions continuing to be the dominant player in cross-border financing business in debt capital and loan markets, rising private credit borrowers have also contributed considerably in offering loans globally. The American debt and loan markets have been in good health ever since the 2008 mortgage crisis. They have even been able to offer loans at very competitive rates for overseas borrowers.

Why Cross-Border Financing is Important?

In the recent past, many large firms have gone on to avail cross-border loans instead of debt financing. This move has impacted cross-border financing options, such as covenant-lite loans. These loans provide borrowers with much-needed flexibility as compared to regular loan regulations.

Several international companies have opted to avail cross-border financing as they have global subsidiaries spread across numerous countries. Choosing cross-border financing over other financing options will allow companies to make the maximum use of their borrowing ability and resources to go for optimum growth across the globe.