Businesses: which currency should you use for financing?

Financing your business in local currency

For most companies, initial financing is usually arranged in the local currency to avoid unnecessary complications. And with good reason: whether it involves borrowing money, raising funds or going public, these processes are generally easier to manage at a local level.

As a company’s primary market is often the area where it is based, it makes perfect sense for companies to instinctively raise finance in their domestic currency (since this is the currency they use for invoicing and payments).

As they grow, and even as they begin to expand internationally, companies tend to stick with domestic financing solutions, even if this means converting the funds obtained into the foreign currency or currencies they require at a later stage.

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Financing your business in foreign currencies

Whilst financing in the domestic currency remains the norm, financing in foreign currencies also has certain advantages.

Just as buying property abroad or investing in foreign currencies broadens the range of options available to you, seeking a source of finance beyond national borders also allows you to take better advantage of competition.

Interest rates, the collateral required, the terms on which funds are made available… All the characteristics of a source of finance can vary significantly from one currency area to another. By looking to secure finance internationally, a business therefore increases its chances of finding the perfect fit!

Please note, however, that taking out a loan in a foreign currency exposes you to exchange rate risk. If your loan has a variable interest rate, you will be exposed to a combined interest rate and exchange rate risk, which can be difficult to manage.

As part of a fundraising round or an initial public offering, a company may also choose to raise funds in a currency other than its domestic currency in order, for example, to take advantage of the liquidity of a foreign market or to gain greater media exposure within its target market.

Swiss or European start-ups may therefore be encouraged to turn to US funds to finance their growth in dollars when the sums involved are too large for the local ecosystem.

In the same vein, Chinese companies were at one time attracted by the prospect of listing on the New York Stock Exchange in order to gain visibility in the Western world (before being called to order by Beijing).

Swiss franc, euro, US dollar… Which currency should you choose?

When it comes to financing their growth, companies usually opt for the most stable and secure currencies, such as the Swiss franc, the euro or the US dollar. The choice of a particular currency therefore depends on both endogenous factors (specific to the company) and exogenous factors (specific to the economic, financial, political and monetary environment).

To make the right choices and secure the best financing terms, it is therefore important to compare interest rates across different currency zones and the depth of the capital market, but also, and above all, the quality of the services on offer.

Finally, when financing in a foreign currency, it is essential to assess the competitiveness of the exchange rates for that currency, particularly if you plan to incur expenditure in other currencies.

As a result, some Swiss or European companies have no qualms about accepting funding in US dollars, which they then convert into the currencies required to develop their target markets (such as the pound sterling for the UK, the renminbi for China or the yen for Japan, for example).

Hedging currency risk

When a company borrows in a foreign currency, it is exposed to foreign exchange risk. Specifically, this refers to the likelihood that the exchange rate will move against it between the date of borrowing and the date of repayment.

To avoid this sort of setback, the company can, however, lock in the exchange rate for its transactions by implementing a hedging strategy, for example by purchasing forward contracts.

You now have all the key information you need to choose your funding currency. Once you’ve made your choice, all you need to do is set the exchange rates for your provisional budget!