What You Need to Know About International Asset-Based Lending
While economic growth has been slow worldwide, the asset-based lending industry has seen solid growth in recent years, with growth rates as high as 33% since 2006. As such, there is a growing need for lenders in the US to finance overseas. However, lenders face clear challenges in this area: in this article, we will highlight a few key issues of which you need to be aware.
When dealing with international asset-based lending, you should be aware of legal and regulatory differences that exist across borders. Every country is different, and most countries have distinct statutes and limitations when it comes to financing. In addition, there may be regional differences within a country. Even small regulatory issues can hamper you; for example, a shipment may get stuck because the pallet you shipped on was made from a protected species of tree. Furthermore, language barriers can lead to miscommunication, and cultural differences can cause misunderstandings.
Laws regarding liens can also present issues. In many places, such as the United Arab Emirates, there is no centralized way to file a lien, or to even check if a priority lien exists for a company. For example, countries such as Germany and Spain do not lend themselves well to blanket liens, which are often utilized in the U.S. Instead, lenders must make a pledge against every single asset in question, which can be cost prohibitive.
Given all the possible aforementioned cross-border obstacles, it is invaluable to partner with someone who has experience and local knowledge. This is not to say due diligence should be neglected, as it is important for you and your team to be aware of potential pitfalls. However, the use of local experts can afford you a deeper awareness of a jurisdiction than simply acting alone. Furthermore, finding a single distributor in a foreign country can also help you avoid some of these barriers – it is easier to sell to one person than to sell to one hundred, especially with language barriers.
In many places – China, France and India, for example, asset-based lenders need a license to do business. This is often an expensive and time consuming process. Banking licenses are required, and often the application waiting period can disrupt the deal-making process. These licenses also come with covenants and restrictions, often forcing the lender to keep the money within national borders – this is especially true in developing countries like China and India, as well as in countries with political or economic instability. Given that an inability to freely move money could be problematic, it may be best to avoid the aforementioned type of countries.
Beyond cross-border regulatory issues, there are other problems to be aware of. Namely, corruption and political risk. In many countries, (especially developing ones) bribery is a standard way of conducting business. If you are financing from a country wherein this is not the norm, navigating this kind of landscape is difficult and not recommended. While these countries may someday be places where money can safely be made, key regulatory changes need to occur.
A lack of diversification by lenders can cause them to fail. Avoid a high concentration of deals in a particular country, even if it is spread across several companies. If a country experiences political or economic hardship, assets could be frozen and a portfolio may be at risk. Additionally, you should avoid overconcentration in one particular industry. If steel prices plummet worldwide, geographical diversification will not matter. To further hedge risk, one can use credit insurance. This can be an important backstop in the case of slow payments or bankruptcies. Internationally, it is often difficult to truly know the state of a business entity without local insight, so having the added security of credit insurance will no doubt prove useful to lenders.