Keys to internationalisation

The financial resources needed to undertake internationalisation projects may be considerable. Having sources of financing is very important for any business activity. It is even more important for internationalisation projects.

When the company lacks sufficient internal funds to undertake a project, it may turn to outside sources for financing. The advantages of having sources of finance are:

• Increased competitiveness. If your offer is both technically and commercially sound and you accompany it with a competitive financial offer, you will gain an edge over the competition.
• Security. Drawing up a financing plan with the buyer will  increase collection security.
• Adaptability to the requirements of the customer and of the contract.

This is the group of financial instruments that receive some sort of funding or subsidy from the State. Their objective is to boost exports and investments abroad. In other words, they are instruments for promoting international business activity.

The Organisation for Economic Co-operation and Development is the body that determines the rules of the game member countries must follow in officially supporting exports. It applies to transactions with amortisation periods of over two years and to tied aid arrangements.

The State of Spain applies the Reciprocal Interest Adjustment Contract (CARI), the Export Credit Insurance (CESCE), and Development Assistance Funds (FAD).

The items that follow describe the Main government financing programmes:

• Financial Support for Exports.
  This is a system for supporting Spanish goods and services exports. It stimulates the issuing of export credits at fixed interest rates in accordance with the OECD Consensus. The CARI system works as follows:
  The exporter makes an export offer to the customer and informs them of the credit available to them and the advantages provided. The export credits are issued by financial institutions. The institution can sign a Reciprocal Interest Adjustment contract with the ICO (State Credit Institute).
  This agreement offers several forms of credit:
  • Foreign buyer credit.
    The financial institution grants credit to the foreign buyer, who thereby becomes the borrower. The exporter receives the  amount of the credit directly as payment for the sale. It is therefore the financial institution that assumes the risk of default. It may cover this risk with the CESCE buyer credit insurance policy
  • Supplier credit.
    In this case it is the supplier or exporter who becomes the borrower. The foreign buyer is bound to the supplier by the export contract. The CESCE supplier credit policy insures this type of transaction for periods over three years.
  • Line of credit.
    This is a variation of the buyer credit. The financial institution gives the borrower (generally a bank in the buyer's country) a lump sum that can be used to finance various export contracts.
  Items covered:
  
  • Costs of exported goods and services originating in Spain. This includes:
    • Freight charges and transport insurance
    • The export credit insurance premium
    • Costs of foreign goods and services  limited to 15% of the total
    • Service charges
    • Local expenses
    • Paid and capitalised credit interest.
  Financing may be used for up to 85% of the costs of exported goods and services and service charges, and up to 100% of local expenses. One aspect of CARI is that once the credit is signed, the applicable interest rates are the Commercial Interest Reference Rates (CIRR). These are characterised by the fact that they remain constant until the total amortisation of the loan.
• Development assistance funds (FAD)
  This is a State financial support instrument, whose funding is assigned annually in the National General Budget.
  There are four types of FAD aid:
  
  • Credits and donations.
    FAD aid is usually directed at this method of acquiring Spanish goods and services. Countries with a per capita GDP within the limits established by the OECD are eligible for FAD aid programmes. FAD credits are granted only to projects that are not commercially viable, and may be used to finance up to 100% of the project, subject to the following limitations:
    • a maximum of 15%  of total foreign goods and services.
    • a maximum of 15% of total local goods and services.
    The State Credit Institute (ICO) is the State financial agent that acts for and on behalf of the government in the administration of FAD credits.
  • Contributions to multilateral development bodies.
    This is aid that takes the form of a donation from the FAD. One of the methods of granting this aid is through contributions to Multilateral Development Organisations of which Spain is a member.
  • Lines of financing for feasibility studies (FEV).
    FEV is a line of FAD that funds feasibility studies for feasibility studies prior to internationalisation carried out by Spanish companies in foreign countries. Funds can be used for three types of feasibility studies: those tied to concrete projects, those tied to sectorial projects, and consulting services.
    The first criterion for choosing a project is whether it is clearly in the interest of all Spanish companies, not just the one performing the study.
    There are three types of FEV:
    • Public: a donation from the Spanish government to the country hosting the study. These funds are processed through the beneficiary countries.
    • Multilateral: resources channelled to Spanish consulting funds in the Development Banks, which fund studies carried out by Spanish companies.
    • Private: companies interested in conducting a study apply for cofinancing. Once it is approved, the CESCE issues a Feasibility Studies Insurance policy covering the risks of the company conducting the study.
  • Liña 500.
    This line of financing offered by the FADs pays for consulting services contracted for identifying, defining, monitoring, or evaluating projects that are going to be carried out with FAD funding. The ICO is the body that grants this type of aid.
    
• Export credit insurance.
  The other major pillar of government aid made available to companies in order to promote exports is insurance offered by the State through the CESCE company, primarily the Export Credit Insurance.
  Companies doing business in high-risk markets often have difficulty obtaining funds from private institutions, particularly for medium and long-term projects. Through these insurance policies, the State assumes commercial and political risks and facilitates entry into difficult markets. This way the banking institution, knowing that there is an organisation covering the possible risks of the transaction, will be more likely to provide financing. There are different types of policy, some providing direct cover to exporters and others covering the risk of the financial institution. Regardless of the type, CESCE is the entity that issues them.

Recent years have seen a striking increase in exports abroad. The existence of government support mechanisms has contributed to this effect. The promotion is based on four basic pillars:

• Information and consulting
• Through the investment consulting service
• Identification of projects and partners
• Investment and business cooperation forums; Investment missions and business conferences; Identification and dissemination of investment opportunites (PIDINVER); Market research programme for investment abroad (PROSPINVER).
• Pre-investment analysis and post-investment support, through the investment projects support programme (PAPI).

The bilateral government bodies providing funds for this type of investment are:

• The State Credit Institute (ICO)
  
  • PROINVEX: PROINVEX: finances large foreign investment projects undertaken by Spanish companies. The minimum amount for loans is 6 million euros. The application is processed through the General Business Directorship of the ICO. Click here for more information.
  • COMPANY INTERNATIONALISATION LINE.
    The objective is to finance investment projects, expand those already in existence, or purchase stock in foreign companies. These funds are given to small and medium-sized enterprises. The financing covers up to 80% of the investment. Click here for more information for more information.
• COFIDES
  The Spanish Company for Development Funding (COFIDES) is a mixed-capital public limited company that offers financial aid for projects of interest to Spanish companies to be carried out in emerging or developing countries.
  The way COFIDES gives aid to companies is through minority or temporary shares in capital and quasi-capital, or through external funds.
  Its two main support lines are:
  
  • FIEX: funds to promote the internationalisation of Spanish companies abroad by purchasing equity in companies with capital and quasi-capital investments. Click here for more information for more information.
  • FONPYME: funds for investments abroad made by small and medium-sized enterprises. These are funds given to  small and medium-sized firms dealing in goods and services. Click here for more information for more information.
  COFIDES also mobilises resources from multilateral sources. Visit its web page. In the aid catalogue you will find a list of aid programmes with multilateral financing.
  Sectorial lines
  Certain sectors considered to be of strategic interest have their own lines of investment:
  
  • Services sector FINSER line
  • Tourism sector: FINTUR line
  • Environmental sector: FINAM line
  Multilateral aid instruments
  There are many organisations that offer financing programmes at the multilateral level. At the COFIDES web page you can access the multilateral aid catalogue. The main institutions involved are:
  
  • the World Bank and Regional Development Banks. More information: http://www.worldbank.org
  • European Union. Visit the Co-operation Office. There you will find information on a wide variety of programmes financed by the EU, organised by topic or by region.
  • IMF. Spain participates in the IMF. Visit its web page: http://www.imf.org.

The private sector is still the main provider of financing for the international activities of companies. It is not the responsibility of the State to replace private initiative. The function of the government financing system is rather to reinforce private initiative in areas where it is insufficient or ineffective.

In many cases government financing will not cover 100% of the transactions. Therefore it is also necessary to have private financing.

Seeking bank financing for exports stems from a company's need for liquidity. This is due to the time that elapses between the products' manufacturing period and the collection of payment for the exports. It may be necessary for two possible phases: pre-financing (from the start of manufacturing until the delivery of the merchandise) or post-financing (from the sale until collection of payment for the merchandise).

Issuing of this type of loan is conditional on market factors, such as the solvency of the exporter and of the transaction itself, or the existence of an insurance policy. The applicable interest rates will depend on the agreement reached with the financial institution: fixed or variable rates.

In the market there are different possibilities for financing, depending on the risk you are willing to take in terms of currency exchange:

• Discount or loan in Euro
• Discount or loan in foreign currency
• Discount in Euro at a provisional exchange rate
• Discount in Euro with foreign exchange risk coverage

In the Financing Strategies section you will find a table of the foreign exchange risks you will encounter under the different financing methods. Take a look.

• Factoring
  Factoring is a direct sale of accounts receivable to an organisation known as a factoring house or to another financial institution. In other words, the debts of the customer are acquired by a third party (the factoring house), which assumes the risk and the task of collecting payment. This intermediary, normally a banking institution or a company owned by one, charges a fee for assuming the risks and interest. With factoring, the exporter ensures collection of payment for its exports and reduces its risks.

• Forfaiting
  Forfaiting is the buying and selling of commercial credits: bills of exchange, promissory notes, and other negotiable instruments with medium-term maturities.
  With forfaiting, the financial institution advances funds to the exporter and guarantees reimbursement of the transaction amount. The financial institution also agrees not to seek remedy against the exporter in the case of non-payment.
  There are many advantages for the exporter: it is almost equivalent to being paid cash down. Political, commercial, and extraordinary risks are eliminated for the exporter. The banking institution is also without risk, as it is covered by the CESCE Floating Policy for Forfaiting.
• Leasing
  Leasing is a medium or long-term financial instrument in which a bank acquires a product and leases it to the importer. At the end of the contract, the importer has the option of returning the product or purchasing it for a previously agreed-upon residual value.
  This method is often used for purchasing industrial machinery and vehicles as well as turnkey facilities and plants. With this arrangement the bank acquires the product in its own name and the importer pays it a monthly rate.
• Foreign exchange credit policy
  When the company has various payments and receipts in foreign currencies, it may see fit to take out this type of policy, which allows it to access credit and collect payments in the specified currencies.
  The main advantage is that the foreign exchange risk is reduced, currency flows are easily administered, the need to change money is reduced, and multiple transactions can be financed simultaneously.

Another option for financing is through venture-capital institutions. These are public limited companies specialising in purchasing temporary equity in non-financial companies not listed on the stock exchange.

Venture-capital firms can operate by granting loans or by other forms of long-term financing. They also provide advisory services. Law 25/2005, of 24 November regulates Venture Capital Companies (ECR), Venture Capital Partnerships (SCR), Venture Capital Funds (FCR), and managing partnerships.

At the web page of the Asociación Española de Entidades de Capital Riesgo (Spanish Association of Venture Capital Companies) you can view the existing companies and obtain more information:   http://www.ascri.org.

• Short-term operations
• Long-term project financing