Funding American Subsidiaries.
When I arrived in the US to head up the Chicago office for Bibby, I did not realize that the differences across the pond would be so vast. I was amazed that so much time and money were spent with attorneys but soon realized that this was dictated by the litigious society I was now living in.
So, what have been the hurdles and differences that needed overcoming:
Is the business owned by a US citizen, US domestic company, or a foreign citizen or company?
Most US-based financers require personal or validity guarantees, and their lack of UK legal knowledge scares most away from funding foreign-owned businesses. The thought of suing a UK-based individual or company appears daunting, so the simple solution is to say “no”.
How to choose a banking relationship?
Banking in the US is very different than banking in the UK. First, there are less than 400 banks in the UK. There are approximately 5,000 banks in the US, from small community banks to huge multinational banks. Each US bank and bank branch may offer different products and services dependent on the state in which the bank is situated, the size of the bank, and the industries with which they are comfortable. Local community banks likely will offer a line of credit more freely than the large national institutions and be more supportive of smaller businesses, but likely will turn away a UK-owned prospect. Selecting a bank will take time and energy that would be better spent growing your business.
The US business back-office operations are in the UK.
Besides the 5 – 8-hour time difference, US banks and financers are uneasy with the distance and lack of geographical accessibility if things go wrong. Additionally, if a borrower’s assets are primarily in the UK, developing an exit strategy may appear daunting, exacerbated by a lack of knowledge of the UK legal system and understanding of the UK insolvency laws.
How does the financing differ in the US?
Financial products and services available in the UK are much more affordable than similar products in the US. Factoring fees in the UK are generally a one-off percentage against the invoice value. Factoring fees in the US often are structured as a monthly fee while an invoice is outstanding. In addition, it is not unusual for interest to be charged on funds employed.
Many UK companies have a confidential or undisclosed invoice discounting facility and are looking to obtain the same product in the US; however, because of US banking rules and regulations, these products are unavailable. In the UK, trust accounts established by a financier in the company’s name allow funds to be collected under the financier’s control. The US alternative is for a business to open an account subject to a deposit account control agreement. It should be noted that there are costs involved in opening these types of accounts, and not all banks will accommodate this practice because of the perceived exposure to damages related to administrative errors. Additionally, banks willing to provide accounts subject to deposit control agreements will often charge a substantial amount to prepare legal documents to open the account.
UK financiers tend to be descriptive in the terminology used to describe financial offerings. In contrast, US-based financiers tend to use “Asset Based Lending” for a myriad of products. It is vitally important to understand which assets are being used as collateral and the specificity and frequency of reporting to the financier. While English is our common language, I soon realized that certain words and phrases require “translation”. Take a deep delve right at the outset of any conversation to truly understand what is being offered.
For example, Trade Finance, also known as Purchase Order Finance, is often advertised as a product available from many US-based lenders; however, most of these lenders are providing an over-advance to an existing accounts receivable accommodation and are not able to provide the funding required by their clients. Genuine Purchase Order lenders deeply understand import/export, documentation, shipping, and the ability to pay suppliers in different formats.
Differences between products and services offered by UK and US-based financiers are vast but can be overcome. Once a prospective borrower becomes aware of these differences and has the information to translate and maneuver around, the opportunities are immense.
I was recently told that resources to assist UK businesses with US subsidiaries were extremely limited, which is why this “migrated Brit” receives these inquiries. I have had the pleasure of helping and funding numerous UK-owned subsidiaries and have taken great pleasure in seeing the growth and the benefits they are reaping from these US divisions.
I love my life and the factoring industry in the US; however, the learning curve was huge, but the journey was not wasted.
Article produced by Sue Duckett