Global Founders' Headache #4: Moving Cash Across Borders to Fund your Operating Companies
Navigate the complexities of global business management, starting with funding the operations of your business abroad with the money raised at the holding company level.
In some countries, attracting capital from international investors necessitates the establishment of an offshore company. You can try my offshore company matchmaker.
As soon as you set up an operating entity in a country where you plan to launch your product or hire staff, you manage a group of interconnected entities — welcome to global business management. Yeah…😒
Global business management is painful and costly. As a startup founder, this is an admin nightmare. I've got you covered, keep reading to learn how to stay on top of this topic.
First, let’s focus on the positive: if you are confronted with this issue, it means that you’ve raised your first round, congratulations!
This post helps you unpack the complexities of global business management, starting by guiding you through the transfer of cash from your holding company to your HQ or operating entities.
We won’t dive into how to manage FX, currency fluctuations, or transfer pricing - it will be the topic of other articles (more exciting than a Netflix series, right?). Instead, we will address four questions:
What should you consider when moving cash across borders?
What are your operational priorities and constraints?
What are your options to move cash across borders?
Who can help ensure that you won’t end up in jail? spoiler: a brilliant & business-oriented accountant with cross-border experience 😃
You can use this article as a roadmap to build financial flows between entities that make sense for your business or as your cheat sheet to staff your accountant and lawyers. As always, keep it simple and be methodical to maximize the limited amount of time you have to dedicate to these topics.
To illustrate the topic, I used Delaware holding and operating entities in Africa. The reasoning should be pretty similar for other countries/jurisdictions.
STEP 1: Operational Considerations
You cannot decide how to move cash across borders if you don’t understand why you need to move it and how it serves your business in the short and mid-term.
The goal is to quickly gather enough information to make informed decisions. Ultimately, as founder/CEO, you want to know enough to manage external providers or teams handling these matters.
⭐️ Remember: The best decisions are driven by your business needs + any reversible decision should be taken quickly.
To help you think this through, I’ve mapped out three key operational considerations:
(1) how much cash do you need to launch your operations?
(2) how do you intend to use your holding company?
(3) how frequently do you need to fund your operating entities?
Consideration 1: Working capital
Financial planning for the next 6-12 months of operations will help you identify how much cash you need at the operating company level. This is a way for you to rationalize how much cash you need to move from the holding company to your HQ or operating entities. It is not a precise science, just common sense!
Consideration 2: Purpose of the holding company
You want to set clear objectives for your holding company to determine how much capital you need to maintain at that level and be prepared to manage financial flows down the line.
⭐️ Remember: At this stage, this is admittedly quite obscure. You want to remember that hiring, purchasing, and invoicing have accounting, legal and tax implications. You cannot use companies alternatively even if they are part of the same group, each company is a separate person!
Understand the jargon
There are typically two scenarios: either your holding company is used only for fundraising purposes (scenario 1), or your holding company is also used as a costs or profits center (scenario 2).
⭐️ Jargon Cheat Sheet:
Fundraising entity only = dedicated to raising capital with investors.
Costs center = does not generate revenue, it usually includes the HR, IT, and administrative departments.
Profits center = generate revenue and responsible for turning a profit.
Holding company = doesn’t engage in direct business operations or selling. Primarily involved in the ownership and strategic management of the operating entities.
Operating company = focus on core business activities and customer interactions necessary for generating profits.
To refresh your memory about holding company / operating company read my previous post.
Determine the purpose of the holding company
The card below can help you determine what’s the scope of your holding company. It can be cumulative purposes, e.g. fundraising and cost center or fundraising and profits center.
The purpose of the HoldCo may change over time. It doesn’t have to be set in stone. You need to understand that the moment the entities of the group start to provide services to each other, things become more tricky - this is when we enter transfer pricing territories.
For now, we just need to be able to determine if the holding company is operational to maintain enough cash at that level to pay taxes, legal fees, accountants, subscriptions to services, etc.
Consideration 3: Funding Frequency
To determine how frequently you need to move cash to fund your operations, take into consideration your business needs and any constraints specific to your sector of activities or geography. For example, you could consider:
Whether you have a $ USD bank account at the level of the operating entities.
If yes = no currency fluctuations to manage.
If no = you may factor in the currency fluctuations in the country in which you operate to help you determine the frequency of the intercompany funding.
Whether you have access to a treasury account in the U.S. offering a good yield with low-risk and high liquidity portfolios.
If no = no working capital investment to consider.
If yes = you may want to leverage that to invest your money and size the working capital for your operating companies accordingly.
This is a way for you to evaluate where your money is best protected or invested. If you need to manage currency fluctuations, you can time the funding based on the exchange rate. If you can invest the money in the U.S. with a good yield, you may want to withdraw from the holding company’s account enough money to cover the operating expenses without too much buffer.
⭐️ Remember: This is not a precise science, the idea is to give you mental models to think through the size of funding and frequency. Don’t try to become a currency trader!!!!
STEP 2: Determine your Priorities and Constraints
To choose the best funding method for your business, you want to put in perspective your key priorities and constraints. They are influenced by your sector of activities, regulations, and geographical scope.
For example, you could consider the following priorities and/or constraints:
Ability to repatriate funds to the U.S. if you operate in countries where government regulations can change overnight or local currency can become Monopoly money.
Strengthen operating entities’ balance sheets to obtain loans with local banks or government subsidies for startups
Minimize tax implications at the operating company level.
Minimize paperwork and create a streamlined process.
Compensate entities for rendering services to each other to be compliant with tax regulations.
⭐️ Remember: the purpose of this article is to help you get smarter on these topics and share mental models. Don’t fall into the pitfall of trying to optimize for every dollar.
STEP 3: Moving Cash Across Borders
Now that you know what you need, let’s see how we can make it happen!
Understand the jargon
Let’s make sure we understand the relationship between the companies and the fancy jargon:
The HoldCo owns 100% of the OpCo, which means that
the OpCo is a subsidiary of the HoldCo
the HoldCo is the sole shareholder of the OpCo.
The HoldCo and the OpCo are entities of the same group, which means that transactions between them are called “intercompany” transactions or cross-entities operational transactions.
Three methods to move cash across borders
There are typically 3 methods to move cash across borders to fund your operations. It is quite common to combine multiple funding methods to achieve your business and operational goals.
TD; LR
Method 1: Intercompany Loan (Shareholders’ Loan)
The most simple is to fund the operating companies through a shareholders loan, also known as an intercompany loan.
To fund the OpCo, the HoldCo can lend money to the OpCo.
Accountants or corporate lawyers can help you prepare such agreements. To be prepared, 3 things to keep in mind:
Set an interest rate. Even if the OpCo is owned by the HoldCo, you do need to set an interest rate to make the transaction fair - also known as an arm's length transaction.
😞 The downside is that the interest will be considered as revenue for the HoldCo. 😊 The upside is that the interest can be used to repatriate funds to the HoldCo.
Determine if you want the loan to be converted into shares. Depending on your priorities, you may want to consider a convertible loan. The conversion of the loan into shares of the OpCo can be beneficial from an accounting perspective if you want to strengthen the balance sheet of the OpCo to be able to borrow money locally or comply with local regulations.
Keep track of previous transfers. You can document the transfers from the HoldCo to the OpCo after the fact. Your bank transfers can be used to track such transfers. Make sure you share the list of such transfers with your service provider to record them in the intercompany loan agreement.
Method 2: Investment (Capital Contribution)
The HoldCo can also invest in its subsidiary (OpCo), through a capital contribution, also known as an equity injection. This is an investment.
😊 From an accounting perspective, it can strengthen the balance sheet of the company which can be useful to comply with minimum capitalization requirements or to prepare a local bank loan application.
😞 The downside is that it is not (easily) reversible, as you cannot “reimburse” the money as easily as with a loan.
That’s why I said that it is quite common to combine multiple options to fund the entities to achieve your business or operational goals 😉.
Method 3: Intercompany Services (Products Resale)
This is the best option if there are some services rendered between the HoldCo and the OpCos.
Let’s take an example (super simplified, because you know I like to keep things simple stupid):
🇺🇸 You are targeting the U.S. market and you set up a sales team in New York.
🇰🇪 The rockstar developers building the product are based in Nairobi, Kenya.
→ In this scenario, the product built by the employees of the Kenyan subsidiary is incurring costs at the level of that subsidiary while the sales proceeds are cashed by the U.S. entity (HoldCo).
→ To be fair, the U.S. entity needs to compensate the Kenyan subsidiary for the time and money invested to build the product that it is then selling to the U.S. market. The Kenyan authorities won’t be very happy if you tell them that a company based in Nairobi doesn’t generate any revenue although it hiring developers who are building a product that is being sold in the U.S. Won’t be cool 😒
Things become tricky when there are some services rendered between the entities as you need to comply with international tax regulations. Don’t freak out, it’s simple if you set up intercompany service agreements and keep in mind that transacting with entities of the group has tax implications.
⭐️ Remember: The purpose is to ensure that each cross-entity’s transactions are at arm’s length (i.e. ensuring they mirror the terms that would be agreed upon by independent entities under similar circumstances). This is an intro to transfer pricing, I’ll dedicate a blog post to it.
STEP 4: Don’t be Shortsighted, Hire a Stellar Accountant.
Everything you learned in the previous sections should make you understand that hiring a stellar accountant is critical for building a global business.
This is money well spent to help you set up best practices for your business and create the foundations to scale. The money you’ll save on a good enough local accountant will be wasted later on if you need to fix things and spend time managing it.
Also, think of it as money well invested to learn from the best how to manage a global business. This is in the CEO’s job description 🤭 (I am a tiny bit annoying, I know).
How to identify a gem accountant for your business? Here is a check-list:
✅ Cross-border experience.
✅ Part of a global firm or established relationships with firms in the countries in which you operate to facilitate seamless communication and exchange of information.
✅ A clear understanding of your business needs.
✅ Ability to present information and options to enable you to decide without being an expert.
⭐️ Remember: Turning it into a learning opportunity would reduce a lot of frustrations. If you don’t want to manage this part of the business, first understand it, go through the pain of it, and then hire or appoint someone in your team to be the decision-maker. It requires a high level of trust, but you can delegate to this person gradually.
Final Thoughts
If you’ve read my previous posts you start to see the decision-making framework patterns:
Understand the topic and why it matters
Then, ask yourself what’s important for your business in the short and mid-term
With all that in mind, what’s the best solution for my business?
Hire and staff accordingly the right team member/expert to execute
Legal & Finance Ops should always be driven by business needs. Changing the paradigm is the secret sauce to reducing frustrations: think of legal, tax, and other boring stuff as enablers to your success - a bit far-fetched, but you get my point 🤭.
Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.
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Useful and accessible read. Thanks for the tips!