Business struggles to finance overseas expansion

Many Australian businesses are being forced to rely on earnings or money borrowed from friends and family in order to get the funds they need to expand overseas, a new study reveals.

The vast majority of Australian business owners have a strong focus on overseas growth, with only 5% reporting that they aren’t currently exporting and have no plans to do so in the future, according to the survey of almost 500 mostly small and medium sized businesses by the Export Finance and Investment Corporation.

But obtaining the money required to fund overseas expansion is a key barrier for many businesses. Only 35% of companies reported they were able to borrow money from a bank of other financial institution, well behind the 73% who said they bootstrapped their overseas growth by drawing on retained earnings.

Just over 20% said they were able to fund exports by obtaining credit from suppliers, while 25% were forced to dilute ownership to raise funds – 11% by issuing shares and 7% each from private high net worth individuals or venture capital.

And a surprisingly high 11% say they have found the money for overseas growth by borrowing from friends and family – a figure that rises to 14.5% for businesses with annual revenue of $10 million or lower.

At the launch of the survey results for Victorian business today it was revealed that small and medium sized businesses in the state – the heart of Australia’s ailing manufacturing sector – are particularly reliant on informal sources of finance, with a national high 17% saying they have borrowed from friends and family.

EFIC managing director Angus Armour says the level of reliance on retained earnings and informal finance sources revealed by the survey came as a surprise.

“One of the implications from the survey is that businesses are not getting what they need from the commercial market,” Armour says. “EFIC is seeking to be able to do more in this regard and so are banks by coming to grips with supply chain finance – two banks have already moved in that direction.”

Apart from difficulty obtaining finance, key barriers to international expansion reported by businesses were a lack of local business knowledge, exchange rates, poor overseas economic conditions and fears about the security of IP rights.

The EFIC survey also highlights a significant shift in the steps Australian businesses are taking to increase their exposure to overseas markets.

The volume of exports reported by Australian businesses increased by just 14% between 2000 and 2007, well down from the 59% growth recorded in the preceding seven years.

By contrast, the value of foreign direct investment or earnings from overseas joint ventures or subsidiaries has taken off to the extent that income from those sources now exceeds that from exports.

Armour says this data points to a “profound and exciting” shift that highlights the increasing sophistication of Australian businesses.

“To compete effectively in places like the US and China you often a need a local presence, in many cases regardless of the industry you are in, so it’s a response to that commercial pressure and also a need to deal with appreciating exchange rates,” Armour says.

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